Non-Performing Exposure

From Open Risk Manual

Definition

Non-Performing Exposure is a term used by regulatory authorities to denote lending contracts or other counterparty exposures that are problematic in the sense of unexpectedly deviating from contractual cash flows due to counterparty behaviour.

A harmonized definition has been in proposed in the BIS Guidelines[1], yet the identification of an exposure as non-performing under the harmonized definition is not intended to affect its categorisation as impaired for accounting purposes, or as defaulted in accordance with the regulatory framework.

BIS Guidelines for a harmonized definition

The following exposures are considered as non-performing:

  • all exposures that are defaulted under the Basel framework (eg paragraphs 452 and following the Basel II rules text and their subsequent amendments), where applicable
  • all exposures that are credit-impaired (in the meaning of exposures having experienced a downward adjustment to their valuation due to deterioration of their creditworthiness) according to the applicable accounting framework
  • all other exposures that are not defaulted or impaired but nevertheless
    • are material exposures that are more than 90 days past due
    • where there is evidence that full repayment based on the contractual terms, original or, when applicable, modified (eg repayment of principal and interest) is unlikely without the bank’s realisation of collateral, whether or not the exposure is current and regardless of the number of days the exposure is past due

AQR Manual Focus Areas

Internal definitions of non-performing exposures are included in an Asset Quality Review[2] as any issues identified may have a material impact on the sampling process used for credit file review. For example, if the NPE definition includes all forborne loans, then the stratified sampling approach may require adjustment to reflect this. The areas for investigation are as follows:

  • Definition of Non-performing as compared to EBA simplified approach for the AQR;
  • Identification of any additional, more conservative elements to the bank’s internal NPE definition;
  • Confirmation that the bank measures “days past due” as per Capital Requirements Regulation (CRR) requirements.

See Also

Open Source Software

References

  1. D403: Prudential treatment of problem assets - definitions of non-performing exposures and forbearance
  2. ECB, Asset Quality Review - Phase 2 Manual