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Non-performing loans: regulatory and accounting treatments of assets

David Bholat, Rosa Lastra (), Sheri Markose (), Andrea Miglionico () and Kallol Sen ()
Additional contact information
Rosa Lastra: Queen Mary University
Andrea Miglionico: University of Reading
Kallol Sen: Bank of England, Postal: Bank of England Threadneedle Street London EC2R 8AH

No 594, Bank of England working papers from Bank of England

Abstract: 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.

Keywords: Non-performing loans; impairment; loan loss provisions; bank capital; data standards; credit risk. (search for similar items in EconPapers)
JEL-codes: G01 G21 M41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-ban and nep-eur
Date: 2016-04-22
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