Provisioning

Definition

Provisioning refers to the accounting practice of setting aside amounts to meet probable future expenses of reduction in values of assets.

Examples

• an Impairment Allowance for non-performing loans. Also loan loss provision or loan loss reserves. Provisioning is a tacit recognition that the extended credit is not likely to be repaid in full and/or in time
• provisions for employee benefits under some pension schemes

Types of Provisions

• Specific provisions versus general provisions
• Individually assessed versus collective provisions

Issues and Challenges

In the context of an Asset Quality Review, provisioning approaches are reviewed so that, ex-ante, particular areas of misalignment or aggressive interpretation of accounting rules may be identified.

Focus Areas

The areas for investigation are as follows:

• Use of impairment triggers by internal client segments, (i.e. residential real estate (RRE), other retail, commercial real estate (CRE), other asset finance (e.g. shipping), small and medium enterprises (SME));
• Bank policies and practices for monitoring of client performance (e.g. types of covenant, behavioural analysis etc.) by internal client segment
• Range of haircuts and assumptions applied by the bank to market value of collateral when setting provision levels for collateralised loans
• Provisioning practices under special circumstances (e.g. where the bank holds multiple tranches of the debtor’s capital structure etc.)
• Suitability of bank write off approaches
• Bank treatment and definition of cured assets for provisioning purposes, including forbearance considerations;
• Appropriateness of use of collective provisioning methodology;
• Bank application of an emergence period for IBNR calculation;

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