The main point of this update is the suggestion of Prudential provisioning backstop for
This basically means that, within a certain amount of time, Non performing exposures will have to be fully provisioned. The time frame is different between secured and unsecured loans.
Should Italian banks worry about this?
Current best practice already sets provisioning of unsecured loan at 80-90% at the Unlikely To Pay and 90-100% at Non Performing Loan classification date while coverage of secured loans is normally driven by Collateral Assets’ expected liquidation value.
After 2 years for unsecured loans and 7 years for secured ones
- either the collection process should be finished
- or at least it should be quite clear if further collections have to be expected or not
In the first case it is correct to write off any residual claim if there are any. In the second case banks should be able to provide enough argument to justify the deviation from the recommended 100% provisioning.
Considering that the new guidelines will be applicable only to newly classified at Non Performing Exposures and that the 100% provisioning is strongly suggested, but not mandatory significant consequences can hardly be expected for Italian Banks.
Additional comments in the folllowing post
GLG – Gerson Lehrman Group – Council Member