EBA Long Report - European Banking Authority - Europa

practices for loans in arrears, uncertainties of the status of restructured loans, and through different
practices of reclassifying performing loans which can distort information on reported NPLs.
Further supervisory actions to reduce uncertainties surrounding asset values would be beneficial to
restore market confidence about the reliability of reported asset values and of the status of banks.
Forbearance
While the EBA’s KRIs point to the worsening of asset quality, this did not deteriorate to the extent that could be
expected in an environment of significant economic strain. The average ratio of past-due (but not impaired) loans
to total loans did not increase, and average arrears to total loans ratio decreased, both indicating that loan
portfolios might have been subject to some form of debt forbearance masking the problem.
Forbearance can be a useful remedial tool since it allows stressed borrowers to more easily honour their
obligations in times of temporary distress, and eventually return to a healthy status. However, it can also disguise
credit risks and result in banks’ postponing the recognition of possible losses. Moreover, different approaches to
restructuring loans may yield different results. A simple switch to an interest-only structure may not address the
underlying problem whereas more radical approaches to restructuring, including partial write offs, may have more
permanent effects.
Most respondents to the RAQ indicated that forbearance is mostly granted to residential real estate portfolios,
with other less widespread usage for commercial real estate (primarily loans to real estate developers) and in the
retail and business sector in general.
In the light of expectations of further deteriorating asset quality there is a need to assess and address loan
forbearance in banks, as it may be relied upon as a way to provide temporary relief to distressed borrowers,
especially in a prolonged adverse economic environment, but will ultimately be unsustainable. The ESRB has
recently identified the need to properly assess forbearance on a consistent basis across the EU.
A common definition has been deemed necessary in order to clearly capture the extent of forbearance in a
comparable way. The EBA inIn cooperation with ESMA, the EBA has started work on identifying common
definitions of forbearance and on non-performing loans. Based on such definitions, comparable reporting of
forbearance and aggregation may beshould become possible. In addition, it may become easier to identify cases
of forbearance where loans have been restructured in order to avoid reclassification.
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