THIS TEXT IS UNOFFICIAL TRANSLATION AND MAY NOT BE USED AS A BASIS FOR SOLVING ANY DISPUTE

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1 THIS TEXT IS UNOFFICIAL TRANSLATION AND MAY NOT BE USED AS A BASIS FOR SOLVING ANY DISPUTE (unofficial consolidated text) Official Gazette of the Republic of Slovenia, No. 50/15 basic text (in force since 11 July 2015) Official Gazette of the Republic of Slovenia, No. 96/15 Amendments and Additions (in force since 12 December 2015) Pursuant to point 3 of the first paragraph of Article 93 and point 3 of Article 135 of the Banking Act (Official Gazette of the Republic of Slovenia, No. 25/15; hereinafter: the ZBan-2) and the first paragraph of Article 31 of the Bank of Slovenia Act (Official Gazette of the Republic of Slovenia, Nos. 72/06 [official consolidated version] and 59/11), the Governing Board of the Bank of Slovenia hereby issues the following R E G U L A T I O N ON THE ASSESSMENT OF CREDIT RISK LOSSES OF BANKS AND SAVINGS BANKS 1. GENERAL PROVISIONS Article 1 (content of regulation) (1) This regulation sets outs the rules relating to: (a) the classification of financial assets and commitments given; (b) the assessment of credit risk losses; (c) the forbearance of financial assets; (d) the administration and content of credit files; (e) reporting on risk-bearing on-balance-sheet and off-balance sheet asset items. (2) Wherever this regulation refers to the provisions of other regulations, such provisions shall apply in their valid wording applicable at the time in question. Article 2 (definition of terms) (1) The terms used in this regulation shall have the same meanings as in the ZBan-2 or Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (hereinafter: Regulation (EU) No 575/2013), and in regulations issued on their basis. (2) The following definitions shall apply for the purposes of this regulation: (a) risk-bearing on-balance-sheet asset items are financial assets irrespective of the measurement method used, investment property and inventories of real estate obtained for the repayment of financial assets, with the exception of risk-free on-balance-sheet assets; (b) risk-free on-balance-sheet asset items are cash in hand, property, plant and equipment, intangible assets, gold and other precious metals, and inventories other than inventories of real estate obtained for the repayment of financial assets;

2 (c) risk-bearing off-balance sheet items are commitments given under off-balance-sheet items and derivatives; (d) commitments given under off-balance-sheet items are loan commitments given and contingent liabilities from issued financial guarantees, avals, uncovered letters of credit and transactions with similar risk, on the basis of which the bank may become liable for payment; (e) the Republic of Slovenia means the institutional units that pursuant to Decree on the Standard Classification of Institutional Sectors (Official Gazette of the Republic of Slovenia, No. 107/13) are classified into the sub-sectors of direct users of the state budget (S.13111). Article 3 (assessment of credit risk) (1) Banks and savings banks (hereinafter: banks) shall monitor and assess the credit risk to which they are exposed in their operations. (2) Credit risk means the risk of loss owing to the failure of a debtor to settle its liabilities to the bank. (3) The bank shall assess the debtor s ability to settle its liabilities to the bank and the quality of credit protection by type and amount before the approval of any loan or the conclusion of any other contract based on which an exposure of the bank arises. The bank shall monitor a debtor s operations and the quality of collateral for financial assets and commitments given under off-balance-sheet items for the entire duration of the legal arrangement that is the basis for the creation of an exposure. 2. CLASSIFICATION OF FINANCIAL ASSETS AND COMMITMENTS GIVEN Article 4 (classification of financial assets and commitments given for reporting purposes) (1) The basis of classification is a review of risk-bearing on-balance-sheet asset items and off-balancesheet items by individual type of financial asset with regard to the measurement method, and commitments given under off-balance-sheet items, whereby assets are allocated across individual debtors. The bank shall then classify financial assets and commitments given under off-balance-sheet items into the categories defined in Article 5 of this regulation (hereinafter: categories). (2) The first paragraph of this article notwithstanding, the following shall not be assigned to categories: (a) financial assets held for trading; (b) investments in equity instruments (shares and participating interests); (c) derivatives. Article 5 (classification of financial assets and commitments given into categories) (1) For the purposes of reporting, financial assets and commitments given under off-balance-sheet items shall be classified into categories A to P on the basis of an assessment and evaluation of the debtor s ability to settle its liabilities to the bank at maturity, which shall be assessed on the basis of: (a) an assessment of the individual debtor s financial position, (b) the debtor s capacity to provide adequate cash flows for the regular settlement of liabilities to the bank in the future, (c) the type and extent of the collateral for financial assets or commitments given under off-balancesheet items relating to the individual debtor, 2

3 (d) the settlement of the debtor s liabilities to the bank in previous periods. (2) The following financial assets and commitments given under off-balance-sheet items shall be classified into category A: (a) those to the Bank of Slovenia and the Republic of Slovenia, (b) those to the European Central Bank, international organisations and multilateral development banks to which a risk weight of 0% applies in accordance with the rules set out by Chapter 2 of Title II of Part Three of Regulation (EU) No 575/2013, (c) those to the central governments or central banks whose credit assessment is associated with at least credit quality step 3 under the rules set out by Chapter 2 of Title II of Part Three of Regulation (EU) No 575/2013, (d) those to the regional governments, local authorities or public sector entities that in accordance with the rules set out by Chapter 2 of Title II of Part Three of Regulation (EU) No 575/2013 are treated as claims against central governments referred to in point (c) of this paragraph, in the territory in which they are established, (e) those to the debtors that are expected to be able to repay their liabilities without difficulties and who pay their liabilities as they fall due or exceptionally up to 15 days in arrears, (f) those secured by high quality collateral referred to in Article 6 of this regulation. (3) Financial assets and commitments given under off-balance-sheet items to the following debtors shall be classified into category B: (a) those who are assessed as being able to settle their due liabilities, but whose financial position is currently weak, although there is no indication that it will deteriorate significantly in the future, (b) those who pay their liabilities up to 30 days in arrears. (4) Financial assets and commitments given under off-balance-sheet items to the following debtors shall be classified into category C: (a) those who pay their liabilities more than 30 days and up to 90 days in arrears, (b) those who have undergone a significant deterioration in financial position owing to a change in macroeconomic business conditions or on other grounds, whereby the bank did not suffer or assesses that it will not suffer a significant economic loss in connection with the financial assets, (c) those in respect of which the bank did not forgive or is unlikely to forgive a significant portion of the financial liabilities when the forbearance referred to in Article 21 of this regulation was carried out. (5) Financial assets and commitments given under off-balance-sheet items to the following debtors shall be classified into category D: (a) those for whom there is a substantial likelihood of the loss of part of the financial asset, or of the payment under the commitment given, (b) those for whom the bank has identified a significant perceived decline in credit quality and has created impairments or provisions related thereto, (c) those for whom the bank has ceased to accrue interest in its financial statements, (d) those in relation to which the bank has already incurred a material economic loss when writing-off or selling their financial assets, (e) those whose financial assets have been forborne by the bank in accordance with Article 21 of this regulation, where the forgiveness of a material part of the debtor s financial liabilities has occurred or is very likely to occur, (f) those who pay their liabilities more than 90 days and up to 360 days in arrears, (g) those who are insolvent, (h) those against whom an application for the initiation of compulsory settlement or bankruptcy proceedings has been lodged at the competent court, 3

4 (i) those undergoing compulsory settlement or bankruptcy proceedings. (6) The following financial assets and commitments given under off-balance-sheet items shall be classified into category E: (a) those to the debtors who have the same characteristics as debtors whose financial assets or commitments given have been classified into category D, but for whom it is assessed that the claims against them will not be repaid at all, (b) those with a disputed legal basis, (c) those to the debtors who pay their liabilities more than 360 days in arrears. (7) Financial assets and commitments given under off-balance-sheet items that the bank establishes during individual assessment as requiring impairments or provisioning shall be classified into category P. (8) The payment of a debtor s liabilities means the payment of all the debtor s liabilities to the bank by the contractually agreed deadlines without the bank directly or indirectly creating a new financial asset in respect of the debtor for that purpose. (9) The provisions of Articles 21 and 22 of this regulation with regard to the forbearance of financial assets shall apply mutatis mutandis to renewals, extensions and the creation of new financial assets. (10) The criterion of the regularity of the settlement of the liabilities to the bank may be applied to a greater extent to small debtors and natural persons in particular. Article 6 (high quality collateral) (1) For the purposes of this regulation, the following shall be deemed to be a high quality collateral for financial assets and commitments given under off-balance-sheet items: (a) a bank deposit at the reporting bank for which there is a contractually defined obligation that it be used for the repayment of the debtor s liabilities to the bank, (b) securities of the Republic of Slovenia and the Bank of Slovenia, guarantees of the Republic of Slovenia, and securities issued with a guarantee of the Republic of Slovenia, (c) securities and guarantees of the European Central Bank, international organisations and multilateral development banks to which a risk weight of 0% applies in accordance with the rules set out by Chapter 2 of Title II of Part Three of Regulation (EU) No 575/2013, (d) securities and guarantees of central governments or central banks whose credit assessment is associated with at least credit quality step 3 under the rules set out by Chapter 2 of Title II of Part Three of Regulation (EU) No 575/2013, (e) securities and guarantees of regional governments, local authorities and public sector entities that in accordance with the rules set out by Chapter 2 of Title II of Part Three of Regulation (EU) No 575/2013 are treated as central governments referred to in point (d) of this paragraph in whose jurisdiction they are established, (f) guarantees payable on first demand issued by banks whose long-term credit assessment is associated with at least credit quality step 3 under the rules set out by Chapter 2 of Title II of Part Three of Regulation (EU) No 575/2013, (g) debt securities of banks whose long-term credit assessment is associated with at least credit quality step 3 under the rules set out by Chapter 2 of Title II of Part Three of Regulation (EU) No 575/2013. (2) The following shall be deemed high quality collateral referred to in the first paragraph of this article: 4

5 securities that are neither subordinated nor convertible, and are traded in the financial markets, guarantees and other sureties that are irrevocable and unconditional, and constitute an explicitly documented liability on the part of the guarantee or surety provider. (3) Financial assets and commitments given under off-balance-sheet items secured by high quality collateral pursuant to the first paragraph of this article may be classified into category A until the activation of the collateral, but for no more than 30 days after the deadline for payment. Article 7 (classification of financial assets and commitments given with regard to debtor s credit rating) (1) For the purposes of reporting pursuant to this regulation, in addition to the classification according to the criteria set out in Article 5 of this regulation, the bank shall also classify financial assets and commitments given with regard to the debtor s credit rating into categories A to E by taking account of the criteria set out in points a) to e) of the second paragraph and the third to sixth paragraphs of Article 5 of this regulation, without any consideration of credit protection. The previous sentence notwithstanding, there shall be no need for the bank to classify financial assets and commitments given to individuals not pursuing registered business activities when the bank does not have the debtor s credit rating at its disposal. (2) The bank shall also classify financial assets and commitments given that pursuant to the seventh paragraph of Article 5 of this regulation are classified into category P in the manner set out in the first paragraph of this article. 3. ASSESSMENT OF CREDIT RISK LOSSES Article 8 (creation of impairments and provisions in accordance with IFRS) The bank shall assess the amount of credit risk losses (the required impairments of assets and provisions for off-balance-sheet items) for financial assets and commitments given under off-balancesheet items in accordance with the international standards of financial reporting as defined by Regulation 1606/2002/EC, Regulation 1126/2008/EC and this regulation. Article 9 (objective evidence of impairment or possible loss) (1) Objective evidence of the impairment of a financial asset or a group of financial assets or a possible loss from commitments given under off-balance-sheet items includes information on events that have occurred since the initial recognition of the financial asset that have an impact on future cash flows that can be reliably measured. The bank shall assess whether there is objective evidence of impairment or possible loss, such as: (a) significant financial difficulties of the debtor, (b) an actual breach of contract, such as interest and/or principal payment default or the failure to perform other contractual provisions, (c) the forbearance of financial assets for economic or legal reasons relating to the debtor s financial difficulties, (d) bankruptcy or financial reorganisation, or a likelihood that such developments will occur, 5

6 (e) a measurable decrease in the expected cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including: adverse changes in the settlement of debts in the group, and national or local economic conditions that correlate with defaults on the financial assets in the group. Article 10 (impairment of financial assets) (1) The impairment of a financial asset is the difference between its carrying amount and the recoverable amount. (2) The recoverable amount is defined as the present value (discounted value) of the expected future cash flows, applying the original effective interest rate. (3) The effective interest rate is the interest rate that exactly discounts expected future cash flows through the expected lifetime of the financial asset, or, when appropriate, a shorter period to the net carrying amount of the financial asset. The calculation shall include all fees and other amounts received and paid in accordance with the contract. (4) The impairment of a financial asset measured at amortised cost is measured by means of the original effective interest rate of the financial asset. When the interest rate is variable, the cash flows shall be discounted by the current effective interest rate determined under the contract. (5) Alternatively the impairment of a financial asset may be measured according to fair value, having regard for the market price. Article 11 (provisions for commitments given) (1) Provisions for commitments given under off-balance-sheet items shall be recognised when: (a) the bank has a present obligation as a result of a past event, (b) it is probable that the bank will have to settle the corresponding liability, and (c) the amount of the liability representing a loss for the bank can be reliably estimated. (2) The amount of a provision for commitments given under off-balance-sheet items is equal to the present value (discounted value) of the estimated future payments. A discount rate that reflects the risk associated with the liability (provision) shall be applied in the calculation of the discounted value. The discount rate may not include risks for which the future cash flows have already been adjusted. Article 12 (consideration of credit protection in calculation of impairments and provisions) (1) The expected cash flows from the realisation of credit protection shall also be taken into account in the calculation of impairments of financial assets or provisions for commitments given under offbalance-sheet items. To this end the bank shall ensure the legal certainty of the credit protection via the fulfilment of all contractual and legal requirements in connection with the enforceability of the credit protection, and shall on the basis of its adopted measures, procedures and policies provide for realisability within a reasonable timeframe and appropriate certainty with regard to the amount of repayment from the credit protection used. The bank shall have at its disposal all the requisite 6

7 documentation based on which the legal certainty and effectiveness of the arrangements of the credit protection are established. (2) The expected cash flows from the realisation of real estate and movable property collateral may be taken into account in the calculation of impairments of financial assets and provisions for commitments given under off-balance-sheet items only under the conditions and in the extent set out in Article 13 of this regulation. Article 13 (real estate and movable property collateral) (1) In the calculation of impairments of financial assets and provisions for commitments given under offbalance-sheet items the bank may only take account of the value of the real estate collateral that remains after offsetting the amounts of all the liabilities whose settlement is secured by the same real estate and that are entered in the land register under the real estate in question with a higher priority (seniority), and after offsetting a proportionate amount of those liabilities that are entered in the land register under the real estate in question with the same priority. (2) The most recent appraisal of the market value of the real estate as made by an independent real estate appraiser in accordance with the international valuation standards, provided that the appraisal is no more than one year old, or a sales contract no more than one year old shall be taken into account as the value of the real estate collateral. A generalised market value determined by means of mass real estate valuation methods, which the independent appraiser adjusts as necessary by means of an appropriate haircut, may be used as the basis for the appraisal of the market value of residential real estate valued at no more than EUR 500,000. (3) In the case of credit protection by means of a mortgage, when the real estate collateral is not in its possession the bank shall have at least the following documentation: (a) a directly enforceable notarial record of credit protection in the form of the entry of a mortgage on the pledger s real estate or of credit protection in the form of the establishment of a land debt via an entry in the land register and the issue of a land deed, and, when necessary, evidence that the real estate is justifiably in the possession of another; a final court order allowing the entry of a mortgage or land debt on real estate in the land register with a notarial record of the conclusion of an agreement on the pledging of real estate, and, when necessary, evidence that the real estate is justifiably in the possession of another, (b) a current extract from the land register, (c) an insurance policy for the real estate assigned to the bank, and (d) a valuation report determined in accordance with the second paragraph of this article, which the bank shall acquire when establishing the real estate collateral. (4) While the real estate collateral is in effect, the bank shall regularly monitor the value of the real estate collateral, making an appraisal of the value at least once a year for commercial real estate and at least once every three years for residential real estate. In the event of any significant changes in the conditions on the market, the value of the real estate shall be estimated more frequently. The bank may also use statistical methods to monitor values and to identify real estate that requires revaluation. (5) A reappraisal of the market value of real estate, which shall be undertaken by an independent appraiser, shall be obtained by the bank in the following cases: (a) when there is a material decline in the value of the real estate compared with the general market prices; 7

8 (b) real estate that serves as collateral for a financial asset or a commitment given under off-balancesheet items that exceeds EUR 3 million or 5% of the bank s capital, which shall be reviewed at least once every three years by an independent appraiser. (6) The bank may take account of movable property collateral in the calculation of the impairment of a financial asset or a provision for commitments given under off-balance sheet items, provided that the following conditions are met: (a) the loan agreement shall include a detailed description of the collateral, and detailed specifications of the manner and frequency of revaluation, (b) there exist well-established and publicly accessible market prices for the movable property collateral, (c) the bank has priority over other creditors to the realised proceeds of the collateral with the sole exception of permissible first priority claims set out by legislative regulations, (d) the bank regularly monitors the value of the movable property collateral, at least once a year, or more frequently in the event of significant changes on the market, (e) in its credit policy the bank has documented the types of movable property it accepts as eligible collateral, and the policies and procedures with regard to the requisite coverage (appropriate ratio of the exposure amount to the collateral value) for each type of eligible movable property collateral, (f) in its credit policy the bank has defined collateral requirements relative to the amount of the exposure to the debtor, and requirements with regard to the realisation of the collateral within a reasonable timeframe, with regard to the determination of the price or market value of the collateral, and similar, (g) the initial valuation and subsequent revaluations shall take fully into account any deterioration or obsolescence of the collateral, (h) the bank has the right to physically inspect the collateral, (i) the bank has put in place control procedures for the collateral with regard to the adequacy of property insurance against the risk of damage, (j) the collateral shall be entered in the register of non-possessory liens and repossessed movable property. Article 14 (individually significant financial asset or commitment given) (1) An individually significant financial asset or commitment given under off-balance-sheet items in accordance with this regulation constitutes a total exposure to a single debtor whose value exceeds 0.5% of the bank s capital or EUR 650,000. Financial assets and commitments given under offbalance-sheet items that constitute such an exposure to a debtor on the part of the bank shall be assessed on an individual basis. Article 15 (assessment of evidence of impairment and possible losses) (1) The bank shall on a monthly basis assess in accordance with this regulation whether there exists objective evidence that a financial asset or group of financial assets has been subject to impairment, or whether there exists the possibility of a loss from commitments given under off-balance sheet items. (2) If during the individual assessment of a financial asset or a commitment given under off-balance sheet items the bank establishes that an individual impairment or the creation of provisions is required, it shall reclassify the financial asset or commitment given into category P, which is the group of individually impaired financial assets and commitments given under off-balance sheet items for which the bank is required to create provisions. In this case collective reassessment shall not be necessary. 8

9 (3) If during the individual assessment of a financial asset or a commitment given under off-balance sheet items classified into category P the bank establishes that the particular impairment or provision is no longer required, it shall reclassify the asset or commitment given into a category in accordance with this regulation and shall reinclude it in collective assessment. Article 16 (individual or collective assessment of financial assets) (1) If during the individual assessment of a financial asset there exists objective evidence of impairment, the bank shall estimate the recoverable amount of the financial asset. If the recoverable amount is less than the carrying amount, the bank shall recognise the loss in the income statement. (2) Impairments shall be measured for each financial asset that is individually significant. Impairments of financial assets that are not individually significant shall be measured individually or collectively. (3) When financial assets are being assessed individually but impairments are not required and are consequently not recognised, the bank shall reinclude the assets in collective assessment for the estimation of the required impairments. (4) Impairments of financial assets of banks and savings banks shall be assessed individually, and reinclusion in collective assessment shall not be necessary. Article 17 (individual or collective assessment of commitments given) (1) If during the individual assessment of commitments given under off-balance-sheet items there exists objective evidence of the possibility of loss from the commitments given, the bank shall estimate the probability of such an event for the individual commitment given. If a loss is probable and the amount thereof can be reliably estimated, the loss shall be recognised in the income statement and a provision shall be created for this amount. (2) The required provisions shall be measured for each individually significant commitment given under off-balance sheet items The required provisions for commitments given that are not individually significant shall be measured individually or a collectively. (3) When commitments given under off-balance-sheet items are being assessed individually but a loss is not probable and is consequently not recognised, the bank shall reinclude the commitments given in collective assessment for the determination of the required provisions, which are recognised as a loss in the income statement. (4) The required provisions for commitments given under off-balance-sheet items of banks and savings banks shall be measured individually, and reinclusion in collective assessment shall not be necessary. 9

10 Article 18 (homogeneous groups for collective assessment of losses) (1) The bank shall create homogeneous groups for the collective assessment of financial assets or for the collective determination of the required provisions for commitments given under off-balance sheet items with regard to similar credit risk characteristics that indicate the debtor s ability to settle the liabilities in accordance with the contractual provisions. The homogeneous groups may be defined with regard to the following individual characteristics, or combinations thereof: (a) financial asset type, (b) industry, (c) geographical location, (d) credit protection type, (e) the settlement of debts in previous periods. (2) Estimates of future cash flows from individual groups shall be based on historical loss experiences from such groups or similar groups. Estimates of losses shall be adjusted to changed circumstances on the market. The bank shall regularly review the methodology and assumptions applied in the estimation of future cash flows to reduce the difference between estimated losses and actual losses. Article 19 (disclosure of impairments and provisions in financial statements) (1) Impairments of financial assets that the bank undertakes according to the IFRS shall be disclosed as an impairment expense in the income statement and as a value adjustment of financial assets for reason of impairment in the statement of financial position. (2) Provisions for commitments given under off-balance sheet items that the bank creates according to the IFRS shall be disclosed as a provisioning expense in the income statement and as a liability from provisions in the statement of financial position. (3) The bank shall make accounting disclosure of impairments of financial assets and provisions for commitments given under off-balance sheet items in accordance with this regulation as at the end of each month at the least. Article 20 (recovery and derecognition of financial assets) (1) The bank shall conduct the recovery of financial assets with the diligence of a good manager, as long as it assesses that ongoing recovery procedures are economically justifiable. (2) Should the bank assess in the recovery procedure that a financial asset measured at amortised cost will no longer be repaid and that the conditions for derecognising the asset from the statement of financial position according to the IFRS provisions on derecognition have been met, it shall derecognise the asset from the statement of financial position and shall administer it in the off-balance-sheet records until the acquisition of a legal basis for concluding the recovery procedure in the amount owed, which is of particular relevance in the following cases: (a) for an unsecured financial asset deriving from a loan agreement or an exercised contingency (guarantee, uncovered letter of credit, bill of exchange aval or other contingent off-balance-sheet liability), if the debtor is more than one year in arrears with repayment; 10

11 (b) for a financial asset deriving from a loan agreement or an exercised contingency secured by real estate collateral, if the debtor is more than four years in arrears with repayment and the bank has not received any repayment from the realisation of the real estate collateral during this period; (c) for an unsecured financial asset deriving from a loan agreement or an exercised contingency, if the debtor is already undergoing bankruptcy proceedings; (d) for a financial asset for which the bank s right to claim payment from the debtor in judicial or other proceedings has been terminated by approval of compulsory settlement, in the amount in which the right was terminated. (2a) Until a legal basis has been provided for the conclusion of recovery proceedings, the bank shall also administer financial assets designated at fair value whose fair value is zero as off-balance-sheet items in the amount owed. (3) The bank shall expunge the off-balance-sheet record of derecognised financial assets referred to in the second paragraph and paragraph 2a of this article, and in cases other than those referred to in the second paragraph of this article shall derecognise the financial asset from the statement of financial position when the recovery procedure has been concluded. (4) The bank shall conclude the recovery procedure for a financial asset referred to in the third paragraph in the following cases: (a) on the basis of a final court order on the completion of bankruptcy proceedings; (b) on the basis of a final court order on the approval of compulsory settlement, in the part in which the financial asset was not repaid in full; (c) on the basis of a final court order staying enforcement proceedings, if the proposed means of enforcement have not brought successful enforcement; or (d) on the basis of a resolution by the management board, supervisory board or board of directors without judicial proceedings for the repayment of claims, should continuing legal proceedings be economically unjustifiable, particularly if the costs of judicial proceedings would exceed the repayment of the claims or all actions to achieve the repayment of the claim that would be taken with the diligence of a good manager. 4. FORBEARANCE OF FINANCIAL ASSETS Article 21 (definition and types of forbearance) (1) A forborne financial asset is a financial asset that is created as a result of the debtor s inability to repay a debt under the originally agreed terms, either by modifying the terms of the original contract or by signing a new contract under which the contracting parties agree the partial or total repayment of the original debt. Contracts with an embedded forbearance clause shall also be treated as forborne financial assets. (2) In the forbearance of financial assets, financial difficulties and the ability to repay a debt shall be assessed by the bank at the debtor level. All connected undertakings in a group that are subject to consolidation for accounting purposes shall be treated as the debtor. The debtor s ability to repay the debt shall be assessed by the bank, in addition to the possibility of the acceptance of other assets or repayment on the basis of the realisation of credit protection, primarily from the perspective of the impact of the forbearance on the sufficiency of cash flows from the debtor s operating activities or from the perspective of the possibility of controlling those affiliated undertakings that are capable of generating cash flows from operating activities. 11

12 (3) The bank shall forbear financial assets arising from the exposure to the debtor by undertaking one or more activities that it would not normally decide to undertake were the debtor in a normal economic and financial position. The potential activities and types of forbearance of financial assets, which can be undertaken individually or in combination, are as follows: (a) an extension of the deadline or a deferral of the repayment of the claims, (b) a reduction in the interest rate and/or other charges, (c) a reduction in the amount of the claims as a result of contractually agreed debt forgiveness and/or ownership restructuring, (d) conversion of the claims into an equity investment in the debtor, (e) acceptance of other assets (including realisation of credit protection) for the partial or full repayment of the claims, (f) other activities. Article 22 (accounting treatment of forbearance and classification of forborne financial assets) (1) When the bank applies the forbearance measures for the financial assets, it shall proceed from the updated value of the financial assets in accordance with the IFRS. (2) When the bank forbear a financial asset by modifying terms of repayment proceeding from points a) and/or b) of the third paragraph of Article 21 of this regulation, it shall revise the carrying amount of the forborne financial asset on the basis of the discounted value of the estimated future cash flows under the modified terms, and shall recognise the resulting effect in the income statement. (3) In the event of the reduction of a claim against the debtor by carrying out activities specified in points c) and/or d) of the third paragraph of Article 21 of this regulation, the bank shall derecognise the claim in the part relating to the write-off or the contractually agreed debt forgiveness. The new estimate of the future cash flows for the remaining part of the claim not written off or the forborne claim under the modified terms shall be based on an updated estimate of the probability of loss. In so doing the bank shall take account of the debtor s modified financial position, the economic expectations and the credit protection for the forborne financial asset. (4) When the bank is embarking on the forbearance of a financial asset by an acceptance of other assets (property, plant and equipment, securities and other financial assets), including investments in the equity of debtors obtained via the conversion of bank claims against such debtors, its shall recognise the acquired assets in the statement of financial position at fair value, recognising the difference between the disclosed fair value of the asset and the carrying amount of the debooked financial asset in the income statement. (5) Where forborne financial assets involve or are likely to involve the forgiveness of a material part of the debtor s financial liabilities, the bank shall immediately assign an appropriate credit assessment to all financial assets and commitments given to the debtor in accordance with the criteria set out by Article 5 of this regulation, such that they are reclassified to a category of at least D or P. The bank may assign a higher credit assessment to these exposures to the debtor once the debtor demonstrates its ability to perform its obligations under the new terms. Article 23 (documentation and records of forborne financial assets) 12

13 (1) The bank shall document all decisions taken on forborne financial assets whose value exceeds EUR 100,000 with appropriate analysis of alternative solutions with their economic effects (from the realisation of collateral, the sale of financial assets, the termination of the contract, and any other activities). (2) The bank shall provide analytical records for forborne financial assets in its books of account, including information about the method of forbearance (via an annex to the contract or a new contract), the types of forbearance specified in the third paragraph of Article 21 of this regulation, the dates of forbearance, the effects on the value of the financial assets including the effects from writeoffs and derecognition from the statement of financial position (separately for effects disclosed as charges against value adjustments already created for reason of impairment, and for effects disclosed directly via profit or loss), the change in the probability of loss, the change in the debtor s credit assessment and any change in the performance status of the forborne financial assets. (3) Only the financial assets that are the subject of forbearance, and not all the exposures to the debtor, shall be designated as forborne financial assets by the bank in its books of account. (4) The financial assets shall remain designated as forborne in the books of account until all the conditions set out in paragraphs 157, 176, 177 and 179 of Part 2 of Annex V of Commission Implementing Regulation (EU) No 680/2014 of 16 April 2014 laying down implementing technical standards with regard to supervisory reporting of institutions according to Regulation (EU) No 575/2013 of the European Parliament and of the Council (OJ L 191/2014 and 48/2015) have been simultaneously met. 5. CREDIT FILES Article 24 (administration and content of credit files) (1) The bank shall provide its information and documentation about debtors by administering credit files. The credit file shall make evident basic information on the debtor, the financial position and standing thereof, and the details of the credit relationship. (2) Credit files shall encompass the following mutatis mutandis: (a) basic information about the debtor (business name, registered office, number of employees, ownership structure, company management, direct and indirect capital links); (b) details of the debtor s principal creditors and debtors; (c) the financial statements for last three years; (d) an extract of information on the debtor s indebtedness (before approval of the loan) from the central credit register administered by the Bank of Slovenia, and analysis and an assessment of the financial and economic position of the debtor or the financial instrument; (e) given objective evidence of the impairment of a financial asset, analysis and an estimate of the cash flows for the settlement of the liabilities; (f) a list of all financial assets and commitments given under off-balance-sheet items (account, party); (g) the application for approval of the transaction and the proposal by credit analysis department; (h) the decision of the competent body responsible for approving the transaction, and the contract on the concluded transaction; (i) analytical book-keeping records; (j) evidence of the credit protection and documentation of the realisation of the credit protection; (k) other significant documentation. 13

14 (2a) The provisions of the second paragraph shall also apply mutatis mutandis to the administration of the credit files of natural persons. (3) The bank shall draw up internal instructions for administering the credit files and shall designate the persons responsible for ensuring that the individual files are correct and complete. 6. REPORTING Article 25 (content of reports and deadlines for reporting) (1) The bank shall report to the Bank of Slovenia on risk-bearing on-balance-sheet and off-balance-sheet asset items, and on the classification of financial assets and commitments given under off-balancesheet items. (2) The bank shall report the content referred to in the first paragraph of this article in the form, at the frequency and by the remittance dates prescribed by the Regulation on reporting by monetary financial institutions (Official Gazette of the Republic of Slovenia, No. 96/15) and the Guidelines for implementing the Regulation on reporting by monetary financial institutions of 8 December 2015 published on the Bank of Slovenia website. 7. TRANSITIONAL AND FINAL PROVISIONS Article 26 (entry into force) This regulation shall enter into force on the day after its publication in the Official Gazette of the Republic of Slovenia, and shall begin to be applied on 1 September Article 27 (cessation of application of regulation and guidelines) On the day that this regulation enters into force, the Regulation on the assessment of credit risk losses of banks and savings banks (Official Gazette of the Republic of Slovenia, Nos. 28/07, 102/08, 3/09, 29/12, 12/13, 12/14 and 13/15) and the Guidelines for implementing the Regulation on the assessment of credit risk losses of banks and savings banks (Official Gazette of the Republic of Slovenia, No. 18/14) shall cease to be applied. Boštjan Jazbec President, Governing Board of the Bank of Slovenia 14

15 The Regulation amending the regulation on the assessment of credit risk losses of banks and savings banks (Official Gazette of the Republic of Slovenia, No. 96/15 of 11 December 2015) also includes the following provision: "Article 11 (1) This regulation shall enter into force on the day after its publication in the Official Gazette of the Republic of Slovenia, and shall begin to be applied on 1 September (2) The first paragraph of this article notwithstanding, the bank shall begin applying the provisions of Articles 1 and 4 of this regulation upon its entry into force. The bank may apply the provisions of Article 3 of this regulation before 1 September Article 12 (1) On the day that this regulation enters into force, the Guidelines for implementing the Regulation on the assessment of credit risk losses of banks and savings banks (Official Gazette of the Republic of Slovenia, No. 50/15) shall cease to be in force. (2) The first paragraph of this article notwithstanding, the bank shall continue submitting the RAZ-1, RAZ-1a and RAZ-2 reports in accordance with the guidelines referred to in the first paragraph of this article until the November 2016 inclusive.". 15