What drives the greater or lesser usage of forbearance measures by banks?
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ORIGINAL ARTICLE
What drives the greater or lesser usage of forbearance measures by banks? Paola De Vincentiis1 Accepted: 3 September 2020 © The Author(s) 2020
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. Keywords Forbearance measures · Loan loss provisions · Non-performing loans · Asset quality · Collateral · Credit risk
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, thus avoiding to burden the profit and loss statement with loan loss provisions. Forbearance measures are the core topic of this research paper. The purpose of our analysis is twofold. On one side, 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 will compare different types of banks and different countries in order to * Paola De Vincentiis [email protected] 1
Department of Management, University of Torino, Torino, Italy
understand the drivers that lead to a wider or lesser weight of the forborne exposures as a percentage of the total loan portfolio. Furthermore, we want to analyze which main factors impact on the loan loss provisioning of forborne positions. The final goal of the two analysis is to understand if the forbearance measures are used properly by banks across Europe and if the higher credit risk that is inevitably inherent to forborne positions is well reflected in the level of loan loss provisions. A side purpose is also to gauge if the harmonization effort exert
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