What drives the greater or lesser usage of forbearance measures by banks?

Paola De Vincentiis

doi:10.1057/s41261-020-00136-y

Abstract

After the subprime crisis, with the worsening of asset quality all around Europe, a lack of harmonization emerged concerning credit classification, monitoring, provisioning and writing-off in the banking industry. A wave of analysis and new regulations by the Supervising Authorities aimed at highlighting best practices and creating a common standard, in order to enhance transparency and accounting data comparability across the European Union. A point of particular attention concerned the usage of forbearance measures and the classification and provisioning of forborne positions. This paper deep-dives into this issue leveraging on the public dataset disclosed by the European Banking Authority, following the 2018 EU-wide Transparency Exercise. The purpose of this paper is twofold. On one side, we want to gauge the extension of the forbearance measures’ usage among a sample of major European banks and the drivers of this usage. On the other side, we want to analyze which main factors impact on the loan loss provisioning of forborne positions.

Highlights

Banks often approve concessions or modifications to previous loan conditions
We want to gauge the extension of the forbearance measures’ usage among a sample of major European banks that took part to the EU-wide Transparency Exercise undertaken by the European Banking Authority in 2018
We want to analyze which main factors impact on the loan loss provisioning of forborne positions

Summary

Introduction

Banks often approve concessions or modifications to previous loan conditions. Some of these modifications are just motivated by commercial reasons and aim to retain clients who would otherwise move to competitors. Other concessions are related to financial difficulties of the borrowers and are technically called forbearance measures. Their objective should be either to prevent or help resolving problematic loans, safeguarding the bank’s exposure. A misuse of forbearance measures may be related to disguising non-performing positions, avoiding to burden the profit and loss statement with loan loss provisions. Forbearance measures are the core topic of this research paper. We will compare different types of banks and different countries in order to Context and literature review

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