Restructuring

From Open Risk Manual

Definition

Restructuring is a broad term used to denote a situation where a lending contract or other bilateral credit relationship has become problematic (in the sense of unexpectedly deviating from contractual cash flows) due to the actions of one counterparty and has led to other counterparty granting concessions that it would otherwise not consider. In some contexts (Consumer Finance) it might be a synonym of Forbearance.

A restructuring is a Credit Event that may materially impact a Reference Entity's obligations, such as an interest rate reduction, principal reduction, deferral of interest or principal, change in priority ranking, or change in currency or composition of payment.

Restructuring Units are specialized units with banks or other financial institutions that handle (restructure) problematic exposures, typically by modifying the terms of loan contracts.

Restructuring as a Credit Event

ISDA 2003 Term: Restructuring. FpML full definition: 'A credit event. A restructuring is an event that materially impacts the reference entity\'s obligations, such as an interest rate reduction, principal reduction, deferral of interest or principal, change in priority ranking, or change in currency or composition of payment. ISDA 2003 Term: Restructuring.'

Issues in Asset Quality Review Context

The treatment of forbearance and restructuring is an important element of an Asset Quality Review[1]. Any issues identified may have a material impact on the sampling process used for credit file reviews and the identification of misstatement in the credit file review itself.

For example, if the Forbearance and Restructuring review highlights aggressive use of interest only concessions as a means of limiting past due, a reviewer should be particularly mindful of this fact when assessing individual files for loss events relating to concessions. Further, review of bank forbearance policies provides an additional layer of scrutiny to the DIV assessment of forbearance flagging in the Loan Tape, which constitutes a direct input to the sampling model.

The areas for investigation are as follows:

  • Bank policies for identification and definition of forborne loans as per EBA Implementing Technical Standards (ITS) guidelines;
  • Management Information regarding forborne assets, including details of forbearance approaches offered, associated rationale and acceptance;
  • Policies for restructuring of distressed exposures for each segment, including: range of treatments; prioritisation of treatments; and impact on provisioning (e.g. when would the bank not classify a loan as impaired at the point of forbearance?);
  • Difference in approach for performing vs. non-performing credits for each segment;
  • Ensuring the policies the bank applies to deconsolidating exposures following loan restructuring is appropriate and does not lead to inappropriate “re-ageing” of past due.

References

  1. ECB, Asset Quality Review - Phase 2 Manual

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