1. Nonperforming Loans Presentation For OECD National Accounts Expert Group Meeting October 2002

2. Statistics Department 2 Presentation Outline u Issues raised by Nonperforming Loans (NPLs) u Working Definition u Financial Soundness Indicators

3. Statistics Department 3 Nonperforming Loans EDG u April 2002, an EDG started on IMF website u Aims to settle how NPLs should be treated in all macro. statistics – NA, GFS, BOP and MFS u Background paper raises issues

4. Statistics Department 4 NPL Issues u Financial crises led to new interest u 1993 SNA treatment is based on - avoiding unsound entries - need for valid comparisons - consistent valuations - valid solvency measures

5. Statistics Department 5 NPL Issues u NA do not reflect NPL in flow or BS u Other manuals consistent with SNA u Some countries have NPL regulations, so BCBS, IASB and the IIF developed criteria and recommendations for international reporting

6. Statistics Department 6 NPL Issues Main issues of concern are: u Identification criteria u Valuation of such loans u Treatment of cancellations/write-offs u Treatment of interest Main impact on FIs, shareholders, and customers

7. Statistics Department 7 What causes NPLs? u There are “normal” levels of business failure covered by premiums in interest payments, but.... u Sudden crises can cause - reduced collateral value - reduced credit to good coys - a run on banks by depositors

8. Statistics Department 8 What are NPLs? u SNA says loans are good unless written off/down, but MFSM has loss provisions in “Other accounts payable” u IIF report outlines categories: - Standard : Full payment expected - Watch : Could raise concern - Substandard : Payment in doubt(NPL) - Doubtful : Payment improbable(NPL) - Loss : Virtually uncollectible (>1 yr) (NPL)

9. Statistics Department 9 Value of Loans u SNA doesn’t recognize impairment - same valuation for assets & liab. - negotiable loans valued at market u MFSM recs memo on arrears/losses u B&A I allow asset reductions for impairment, but not liabilities, so can be inconsistent

10. Statistics Department 10 Treatment of cancellations/write offs in the SNA u Cancellation (mutual) – capital trans. u Write-offs in OCV account u Rescheduled loans have new value, balanced by holding gains/losses u Write-downs affect revaluation a/c u Discounted loans quoted in sec. markets should be so valued, but creates asymmetries, requiring supp. data

11. Statistics Department 11 Treatment of cancellations/write offs in the B&A I u Comm. accounting - 3 approaches - Expense against income – add to liabilities (provisioning) - Ditto, but reduce asset value - Do not expense, but appropriate from retained earnings into reserves

12. Statistics Department 12 Treatment of Interest on NPLs u ISMs: - No guidelines as not recognized until “failure”, hence interest accumulates - Could argue FISIM is overstated or services provided but not paid for. Accruing interest that is unlikely to be collected does not make sense, but practical & theoretical problems. u B&A I: Rec. interest not accrue, but work continues to clarify and standardize

13. Statistics Department 13 Summary of Issues u 1993 SNA - records assets = liabilities - does not record provisions - impairment => holding gains/losses when traded but nothing when untraded until loss occurs (OCV) - an “all or nothing” approach. Need a link between micro-accounting and macro, perhaps by use of memoranda items. [Aim of EDG to settle this]

14. Statistics Department 14 Working Definition u Current int. practice, NPLs have: - Princ. & Int. overdue > 90 days, or rolled over by agreement - 90 days criteria OK, but other problems NPLs remain so until w/off or until P & I payments are received

15. Statistics Department 15 Financial Soundness Indicators (FSIs) u In 1999, IMF & WB launched FSAP - identify financial system strengths/vulnerabilities - develop appropriate policy responses u IMF developing a compilation guide - encourage compilation of FSIs - promote cross country comparability - assist compilers and users

16. Statistics Department 16 Nonperforming Loans EDG u Two additional papers - international impairment standards - BOP issues u Has 30 members from a range of int. orgs, stats offices, banks & individuals. u All members of the public are invited to contribute opinions via the IMF website

17. Statistics Department 17 Nonperforming Loans EDG u Access via IMF.org. - Go to site index... - NPL EDG - an online discussion group u The wider the discussion, the more representative the final decision