The Basle Committee issues consultative paper on loan valuation, loan loss provisioning and credit risk disclosure
14 October 1998
As part of its ongoing efforts to strengthen safety and soundness in banks and banking systems, the Basle Committee on Banking Supervision today issued recommendations that provide sound practices guidance on loan valuation, loan loss provisioning and credit risk disclosure. The document sets out banking supervisors' views on sound loan accounting and disclosure practices in banks. It also serves as a basic framework for supervisory evaluation of banks' policies and practices in these areas.
The recommendations are contained in a consultative paper prepared by the Committee's Task Force on Accounting Issues, which is chaired by Mr. Nick LePan, Deputy Superintendent at the Office of the Superintendent of Financial Institutions, Canada, and a member of the Basle Committee.
Mr. LePan stated that "this paper responds in a very real sense to needs in all countries, whether G-10 or non-G-10. There are wide variations in both rules and practices with respect to the timely recognition of deterioration of credit quality. This document can provide a very significant service by filling an important gap in existing international guidance and leading to further harmonisation in this critical area. This paper, once finalised, will represent the first international supervisory guidance on sound loan loss provisioning and related credit risk disclosure for banking organisations."
Mr. William J. McDonough, Chairman of the Basle Committee and President of the Federal Reserve Bank of New York, stated that "this document addresses key issues facing banks and their supervisors. Loan accounting and provisioning practices are an essential part of sound management and control of credit risks in banks. Such practices can significantly affect the accuracy of public financial reporting and the potential for market discipline. In addition, loan accounting treatments have a bearing on the effectiveness of supervisory approaches, including capital requirements."
According to Mr. McDonough, "weak or inadequate loan loss provisioning practices and poor transparency are major sources of risk to individual banks and the banking system as a whole. International implementation of a set of sound practices as set out in the paper would facilitate the supervisors' task of fostering the safety and soundness of banks and the stability of financial systems."
The publication of this paper forms part of the Basle Committee's ongoing work to promote effective banking supervision and safe and sound banking systems. The paper complements the Basle Core Principles, which outline the minimum requirements for a supervisory system in any country to be effective. It also responds to the recognition by such bodies as the G-7 Finance Ministers and G-10 central bank Governors and international agencies such as the International Monetary Fund (IMF) and the World Bank that progress is needed in this area.
The paper is issued for consultation at this stage. Comments are invited from all interested parties, including bank supervisors and industry groups. The Basle Committee intends to finalise the paper in the first half of 1999.
14th October 1998
Notes for editors
The Basle Committee on Banking Supervision
The Basle Committee on Banking Supervision is a committee of banking supervisory authorities which was established by the central bank Governors of the Group of Ten countries in 1975. It consists of senior representatives of bank supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States. Its current chairman is Mr. W.J. McDonough, President of the Federal Reserve Bank of New York. The Committee usually meets at the Bank for International Settlements (BIS) in Basle, where its permanent Secretariat is located.
The Task Force on Accounting Issues
The Task Force on Accounting Issues was established by the Basle Committee on Banking Supervision in 1996, with the mission to foster effective and comprehensive supervision and safe and sound banking systems. The Task Force carries out this task by identifying accounting issues that are important from the point of view of banking supervisors, contributing to international accounting harmonisation efforts and developing supervisory guidance on sound accounting practices in banks. It consists of supervisory experts on accounting issues from the member institutions of the Basle Committee. The Task Force is chaired by Mr. Nick LePan, Deputy Superintendent at the Office of the Superintendent of Financial Institutions, Canada, and a member of the Basle Committee.
Contents of the paper
The paper begins by stating the overall objectives of the Basle Committee in addressing the topic of sound practices for loan accounting and disclosure. It summarises key terms and ties this guidance to the credit risk management process. The paper then provides guidance on sound practices with respect to key loan accounting issues, such as the initial recognition and measurement of loans, measurement of impaired loans, the establishment of loan loss allowances, income recognition and issues relating to troubled debt restructurings. Moreover, the paper presents sound disclosure practices for loan portfolios, troubled loans, loan loss allowances and related risk management practices. The paper concludes with a brief discussion of the role of supervisors in assessing a bank's management of asset quality and the adequacy of loan loss allowances.
To whom is the report useful?
The guidance should be useful not only to supervisors, but also to banks and industry groups seeking information about international sound practices. The guidance could also be of assistance to accounting standard-setters as they work on setting more uniform rules. Banking supervisors and other regulators can use the guidance as a baseline against which national accounting policies and practices can be assessed and improved, e.g. in the implementation of the Basle Committee's Core Principles for Effective Banking Supervision. Other international bodies and groups may also find the guidance useful.
Invitation to comment
The paper is being released for consultation. Comments are invited from non-G-10 supervisors, banks, industry groups, accounting and auditing bodies, and other interested parties. All comments must be received no later than 15th March 1999.
Where can I obtain the full report?
The text of the report, "Sound Practices for Loan Accounting, Credit Risk Disclosure and Related Matters", can be obtained from the BIS Web site at http://www.bis.orgas from 18.00 (Central European Time) on 14th October 1998. It is also available from the Basle Committee's Secretariat at the BIS and from Basle Committee member bank supervisory authorities and central banks.
14th October 1998