Implementation of forbearance still incomplete in many banks

Final draft confirmed by EBA

The EBA has confirmed the regulations on forbearance (“Final draft ITS on supervisory reporting of forbearance and non-performing exposures” of July 2014) published on February 20, 2015. Hence forbearance reporting is confirmed as an integral part of FinRep reporting since of 12/31/2014. Nevertheless, there is still much to do – existing forbearance implementations need to be enhanced and requirements specified by SREP have to be considered.

Underestimated complexity

Although most banks have submitted their first forbearance report at the end of 2014, due to time constraints, many have only implemented an interim solution, e.g. on an excel basis. Many institutions have neither fully implemented the functional requirements of forbearance reporting nor fully integrated them into their processes. This is largely due to the underestimated complexity of identifying forbearance cases within the credit process:

• Missing decision support makes it difficult to correctly classify loan exposures, especially in the corporate client business with its case-specific constellations.
• Numerous banks still have to integrate forbearance as a risk characteristic into their credit monitoring process, especially in intensive care processes, and to adapt their processes accordingly.
• Comprehensive trainings are required in front and back office units.

The individual core bank system’s support of the forbearance process consisting of identification, documentation and monitoring has turned out to be a major driver of complexity and effort. In most cases, the data required for monitoring deferred loan exposures were not available e.g. type of implemented forbearance measures, start and end date of probation period for meeting the deadlines and change between performing and non-performing status. The adjustments necessary in the core bank systems are considerable. In this context, connecting and providing forbearance data for risk reporting, portfolio management and supervisory reporting constitutes another challenge. Meanwhile, it has become evident that an incomplete functional and technical support within the credit process leads to a significant risk of misclassification, which may cause a situation in which risks are not identified or overstated in the portfolio.

Specific requirements from SREP guidelines

The SREP guidelines (“Guidelines on common procedures and methodologies for the supervisory review and evaluation process”) set out requirements for the supervisory review of forbearance portfolios also with regard to inherent loss exposures. Banks should hold available this data in the required granularity to enable the following analyses:

• deferment rates per portfolio and changes over time
• collateral ratios of deferred loan transactions
• migration rates of deferred loans between performing and non-performing portfolios

The data needed for these analyses is basically already contained in FinRep reports. However, this data has to be linked to time series using corresponding historization databases and analysis tools. Such data is essential to meet SREP requirements on validation of forbearance reports and provision of peer group comparisons.

Action required

Forbearance implementation can certainly not be regarded as complete. The new SREP guidelines underline EBA’s intention to increase transparency regarding risks in loan portfolios by means of forbearance. Therefore, banks should definitely strive to implement forbearance requirements completely and to consequently support the forbearance process within their systems. For steering purposes, we recommend to additionally introduce corresponding analysis procedures. To this effect, it is recommended to review and enhance existing implementations.