Non-Performing Loans: Regulatory and Accounting Treatments of Assets

Asset quality is an essential part of sound banking. However, asset quality is difficult for banking regulators and investors to assess in the absence of a common, cross-border scheme to classify assets. Currently no standard is applied universally to classify loans, the most sizable asset on many banks’ balance sheets. As a corollary, no common definition of non-performing loans (NPLs) exists. This paper documents divergences in the definition of NPLs across countries, accounting regimes, firms and data sources. The paper’s originality is in attending to the legal, accounting, statistical, economic and strategic aspects of loan loss provisioning (LLP) and NPLs, topics that are multidisciplinary by nature but have not been dealt with in the literature in an integrated fashion before. Since the 2007 Great Financial Crisis (GFC), accounting bodies and prudential regulators are increasingly focused on early recognition of credit losses and enhanced disclosure. A common approach to NPL recognition might complement these initiatives

Banking union in historical perspective: the initiative of the European Commission in the 1960s-1970s

This article shows that planning for the organization of EU banking regulation and supervision did not just appear on the agenda in recent years with discussions over the creation of the eurozone banking union. It unveils a hitherto neglected initiative of the European Commission in the 1960s and early 1970s. Drawing on extensive archival work, this article explains that this initiative, however, rested on a number of different assumptions, and emerged in a much different context. It first explains that the Commission's initial project was not crisis-driven; that it articulated the link between monetary integration and banking regulation; and finally that it did not set out to move the supervisory framework to the supranational level, unlike present-day developments

Non-performing loans at the dawn of IFRS 9: regulatory and accounting treatment of asset quality

Asset quality is a key indicator of sound banking. However, it is difficult for banking regulators and investors to assess it in the absence of a common, cross-border scheme to classify assets. Currently no standard is applied universally to categorise loans, the most sizeable asset on banks’ balance sheets. As a corollary, definitions of nonperforming loans (NPLs), despite recent steps towards greater harmonisation, continue to vary between jurisdictions. This paper offers a comprehensive analysis of NPLs and considers variations in the treatment of NPLs across countries, accounting regimes, and firms. The paper relies on a multi-disciplinary perspective and addresses legal, accounting, economic and strategic aspects of loan loss provisioning (LLP) and NPLs. A harmonised approach to NPL recognition is particularly desirable, in view of the fact that IFRS 9, the new accounting standard on loan loss provisioning, will be mandatory from January 2018. IFRS 9 changes the relationship between NPLs and provisions, by relying on greater judgement to determine provisions. The potential for divergence makes the need for comparable indicators against which to assess asset quality all the greater