Non-Performing Loans: Regulatory and Accounting Treatments of Assets

80 Pages Posted: 25 Apr 2016

See all articles by David Bholat

David Bholat

Bank of England

Rosa M. Lastra

Centre for Commercial Law Studies, Queen Mary University of London

Sheri M. Markose

University of Essex - Department of Economics

Andrea Miglionico

Queen Mary University of London - Centre for Commercial Studies

Kallol Sen

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: April 22, 2016

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

JEL Classification: G01, G21, M41

Suggested Citation

Bholat, David and Lastra, Rosa M. and Markose, Sheri M. and Miglionico, Andrea and Sen, Kallol, Non-Performing Loans: Regulatory and Accounting Treatments of Assets (April 22, 2016). Bank of England Working Paper No. 594, Available at SSRN: https://ssrn.com/abstract=2768865 or http://dx.doi.org/10.2139/ssrn.2768865

David Bholat (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Rosa M. Lastra

Centre for Commercial Law Studies, Queen Mary University of London ( email )

67-69 Lincoln's Inn Fields
London, WC2 3JB
United Kingdom
+44 20 7882 8070 (Phone)
+44 20 8980 8101 (Fax)

HOME PAGE: http://www.law.qmul.ac.uk/staff/lastra.html

Sheri M. Markose

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
01206 87 2742 (Phone)

Andrea Miglionico

Queen Mary University of London - Centre for Commercial Studies ( email )

67-69 Lincoln's Inn Fields
London, WC2A 3JB
Great Britain

Kallol Sen

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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