Supervisory Reporting on Forbearance

On 21 October 2013, the European Banking Authority (EBA) published its final draft Implementing Technical Standards (ITS) on supervisory reporting on forbearance and non-performing exposures, including the corresponding FINREP reporting templates. These relate primarily to contracts that have been renegotiated because of the financial difficulties of the debtor ("forbearance measures"), or contracts where, on the reporting date, obligations have not been met ("non-performing exposures"). The current ITS mainly affect FINREP reporting templates 18 and 19. The current revised document constitutes the final draft of the ITS. When the EU Commission endorses these standards they will supplement the ITS that have already been adopted. According to the most recent status, the first reporting submission date is 31 December 2014 for data based on the reference date of 30 September 2014.

The overview shown below presents the key data and reporting dates for the regulation:

Background to the regulations

In the current economic environment, the EBA identified, in particular, two main problem areas with respect to asset quality within the EU:

  • the potential misuse of forbearance measures by institutions in order to avoid the recognition of losses, as well as
  • the lack of a standard definition of "forbearance measures“ and of "non-performing exposures“.

The latter, in particular, hinders the comparability of asset quality at various institutions within the EU and, thus, the possibility of standardised data collection by the supervisory authorities. Furthermore, the lack of comparability of the data creates uncertainty in the capital markets.

With the current reporting templates (mainly templates 18 and 19) as well as the related ITS it should be possible to achieve the following objectives, in particular:

  • to standardise the definitions of "forbearance measures“ and of "non-performing exposures“ within the EU, as well as
  • to complement the existing regulatory reporting rules by including the new definitions and reporting templates for the presentation of asset quality.

These should be seen as a supplement to the existing definitions. These measures should, thus, constitute a response to the problem areas identified by the EBA, in particular.

Ways to forbearance….

Exposures that should be classified as "forborne", in principle, are those where the appropriate "forbearance measures" have been instigated.

The EBA has defined "forbearance measures“ as "concessions“ granted to a debtor already facing or about to face "financial difficulties“.

Moreover, the EBA has specified other possibilities when an exposure should be classified as "forborne“. These are presented in the overview shown below.

Institutions should elucidate all aspects in the assessment and implementation.

The main challenges for institutions

When implementing the regulations, institutions can expect the following challenges, in particular, to emerge:

Complexity of the definition of "forbearance“
The EBA has been criticised for specifying definitions that are too complex and not sufficiently principle-based. For example, this concerns the definitional problem of the term "financial difficulties“. The EBA has defined financial difficulties as a situation where the debtor is facing difficulties in servicing its financial obligations, or where this is expected to occur. The EBA has refrained from providing any further clarification for the term because of the possible risk of the definition becoming too narrow ("comprehensiveness" must be ensured). In practice, it would certainly not be easy to come up with a clear definition of the appropriate criteria and/or characteristics.

Deviation from existing accounting processes and regulatory law
The EBA has also been reproached for failing to meet the objective of basing its rules largely on accounting guidelines and requirements that exist already and are used by the institutions. The EBA has justified these type of differences, for example between the IFRS framework and the current ITS guidelines, by highlighting the different aims of both sets of rules. This means that it is very likely that, during the conceptional and procedural implementation of the requirements, additional challenges and difficulties will arise for the credit institutions.

In particular, analogous to the previous consultation paper from 26 March 2013, the following should still be noted. Refinancing measures defined by the EBA as concessions as well as modifications to the terms and conditions of a contract constitute objective evidence of impairment according to IAS 39.59(c). However, if the subsequent valuation shows that there is no need for the creation of a risk provision then, as a rule, exposures that have been granted concessions by the institutions will be identified or reported only to a limited extent. Normally, in order to fulfil the EBA requirements, the appropriate processes and systems related to identifying, tracking and reporting such exposures will have to be implemented and institutions should not underestimate the amount of effort and expense that this will involve. The diagram below provides, once again, a case-by-case analysis in the form of an overview that shows "CRR Default", "IFRS Impairment“ and "Forbearance“.

The implementation of these particular EBA regulations will give rise to more than the usual functional, procedural and technical challenges and, thus, cooperation between the different business units of an institution will gain in importance.

Implementation proposal and potential support that can be provided by SKS

SKS, with its content-related know-how and implementation expertise based on many years of consulting experience and expert knowledge in the areas of accounting, risk management, credit processes and regulatory law, is able to provide institutions with effective support for their business activities as well as for their implementation requirements.

In order to define overall targets for a project and to create concrete plans we recommend conducting a preliminary study to obtain greater transparency and clarity for decision-making.