Standard RA4.6. Reporting of non-performing and zerointerest. Regulations and guidelines

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1 Standard RA4.6 Reporting of non-performing and zerointerest assets Regulations and guidelines

2 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (2) TABLE OF CONTENTS 1 Application 4 2 Objectives 5 3 Legal basis 6 4 Definition of non-performing assets Loans and other receivables Loans to public sector entities and supervised entities Finance company products Credit card credits Special cases and exemptions from the above principles Guarantees given by supervised entities Bankruptcy claims Corporate debt restructuring or debt reorganisation Financial assets or liabilities held for trading Zero-interest assets Below-market rate assets 11 5 Reporting to the Financial Supervision Authority Contents of the report Banks reporting directly to the Financial Supervision Authority Centralised reporting to the Financial Supervision Authority 13

3 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (3) Savings banks Member banks of the Amalgamation of cooperative banks Local cooperative banks Verification of reported data 14 6 Further Details 15 7 Obsolete regulations 16

4 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (4) 1 APPLICATION (1) This reporting standard applies to the following supervised entities as referred to in the Act on the Financial Supervision Authority (587/2003) deposit banks lending institutions (non-performing assets only, J tables) deposit banks' foreign branches branches of foreign credit institutions with deposit bank operations in Finland (state of the banking system only, S tables) (2) The standard uses the general term supervised entity to refer to all entities covered by the standard.

5 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (5) 2 OBJECTIVES (1) This standard sets out the obligations of supervised entities in respect of credit risk reporting. This reporting standard refers to standard 4.4a on management of credit risk, issued within section 4 Capital adequacy and risk management of the Financial Supervision Authority's set of regulations. (2) The standard is designed to ensure that the Financial Supervision Authority receives information on the credit risk position of supervised entities. Credit risks are the most significant risks to which supervised entities with banking operations are exposed. Supervised entities' credit risk management and control are of major importance for ensuring capital adequacy in relation to operational risks and any losses resulting from materialisation of the risks.

6 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (6) 3 LEGAL BASIS (1) The Financial Supervision Authority's regulations are based on section 68 of the Credit Institutions Act (1607/1993). The right to obtain the information referred to in this reporting standard is based on section 15, subsection 2, of the Act on the Financial Supervision Authority (587/2003) and section 16 of the Act on Foreign Credit and Financial Institutions in Finland (1608/1993).

7 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (7) 4 DEFINITION OF NON- PERFORMING ASSETS 4.1 Loans and other receivables Justifications (1) Non-performing assets derive from a breach of contract. (2) If the interest payable on an asset has been in arrears for 90 days, the entire principal must be entered as non-performing. (3) If the repayment of the principal of an asset or part thereof has been in arrears for 90 days, the entire principal must be recorded as non-performing, irrespective of whether interest has been paid or not. (4) If the debtor has paid interest as due but has been unable to make repayments of the principal, the asset shall not be entered as non-performing if the supervised entity and the debtor have agreed on a new payment schedule. (5) All assets deriving from lending shall be recorded as non-performing assets in accordance with the above principles, irrespective of the instrument that has given rise to the asset. Accordingly, non-performing assets could for example be derived from the following items: finance company products credit card receivables bonds and debentures commercial papers agreements on the repurchase or resale of securities.

8 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (8) 4.2 Loans to public sector entities and supervised entities (6) Defaulted assets or payments on guarantees made by the supervised entity must be recorded as non-performing also where the debtor is a public sector entity or supervised entity, or where a guarantee or counter-obligation for the asset has been provided by a supervised entity or public sector entity. (7) If the unpaid interest on an asset guaranteed by a public sector entity can, by virtue of a legal provision, be added to the principal and the debtor has not broken the loan agreement, the asset shall not be entered as a nonperforming or zero-interest asset. 4.3 Finance company products (8) In the case of loan-type products and the financing of accounts payable and individual hire-purchase agreements, the outstanding asset must be entered as non-performing under the same conditions as loans and other receivables. (9) In the financing of hire-purchase agreements based on credit, any sum in excess of the agreed credit limit must be entered as non-performing when it has exceeded the limit for 90 days. When the sum exceeding the credit limit is calculated, the relevant hire-purchase agreement must be removed from the agreements being financed at the latest when an instalment has been in arrears for 90 days. (10) In the discount-based financing of hire-purchase agreements, an individual hire-purchase asset must be entered as non-performing when an instalment has been in arrears for 90 days. (11) In factoring, any sum in excess of the credit limit agreed in the financing agreement must be entered as non-performing when it has exceeded the limit for 90 days. When the sum exceeding the credit limit is calculated, the invoice asset must be removed from the factoring agreements being financed at the latest when it has been in arrears for 90 days. (12) If a seller company that has a credit-based hire-purchase limit or factoring limit in a credit institution engaging in finance company operations (hereinafter finance company) has been declared bankrupt, the sum exceeding the credit limit shall be entered as non-performing. When the sum exceeding the credit limit is calculated, the hire-purchase/factoring agreement or the invoice asset must be removed from the outstanding agreements at the latest when an instalment or an invoice has been in arrears for 90 days.

9 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (9) (13) In leasing, the acquisition cost of the leased asset, less planned depreciation, must be entered as non-performing when the rent has been in arrears for 90 days. The asset shall be considered non-performing until the rent has been paid or the leased asset sold. (14) In purchase contracts related to invoice assets, assets shall be entered as non-performing when the buyer company's payment to the finance company has been in arrears for 90 days. 4.4 Credit card credits (15) The group of the supervised entity must report the credit card receivables of a finance company within the group in accordance with the above principles when they have been in arrears for 90 days. These (nonperforming) assets must be listed under the relevant subsidiary and included in the total amount of non-performing assets. 4.5 Special cases and exemptions from the above principles Guarantees given by supervised entities (16) A guarantee given by a supervised entity must be entered as a guarantee claim as soon as the supervised entity has made a payment under the guarantee. If the supervised entity has only had to pay part of the guarantee, the amount actually paid shall be recorded as a guarantee claim. Any interest payable by the supervised entity because of the guarantee shall be included in the guarantee claim. Outstanding commissions shall not be entered as non-performing assets Bankruptcy claims (17) If the debtor has been declared bankrupt, the supervised entity's claim on the debtor must be entered as non-performing from the date bankruptcy was declared, unless it was already earlier entered as non-performing Corporate debt restructuring or debt reorganisation (18) The initiation in a court of law of proceedings to restructure or reorganise the debts of a debtor shall not give rise to any departure from the provisions of this standard.

10 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (10) Justifications (19) Thus, assets shall still be recorded as non-performing on an asset-byasset basis when they have been in arrears for 90 days and guarantees shall be entered as non-performing when the supervised entity has made a payment under the guarantee. The mere fact that a supervised entity learns that debt restructuring or reorganisation proceedings have been initiated shall not constitute grounds for recording a well-serviced asset as non-performing. (20) The basic provisions of this standard shall also apply when the default in payment is caused by law. (21) An asset entered as non-performing shall be removed from nonperforming assets when a court of law has decided on the restructuring or reorganisation of the debtor's debts and the decision has become legally valid, or when the new payment schedule must be adhered to irrespective of appeal. (22) If, however, the debtor is unable to adhere to the schedule, the asset must again be recorded as non-performing as soon as the payment of interest or repayment of principal has been in arrears for a period of 90 days after the due date specified in the approved schedule. Default in the payment of interest or repayment of principal in respect of one asset shall not, however, automatically mean that all other assets shall also be entered as nonperforming. Rather, each asset shall be reviewed separately. (23) If the schedule approved by the court specifies that an interest rate of 0% be applied to the entire asset, the asset must be reported to the Financial Supervision Authority as a zero-interest asset. (24) If the approved schedule provides that the principal of the asset must be paid before the interest accruing on the principal, the asset shall not be classified as a zero-interest asset Financial assets or liabilities held for trading (25) Losses resulting from financial assets or liabilities held for trading shall be entered as interest expenses or as deduction items in respect of income from interest, foreign exchange or securities trading and as deductions for income from hedge accounting. As losses resulting from financial assets or liabilities held for trading are not entered as impairment losses, they shall not be entered as non-performing assets, either.

11 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (11) 4.6 Zero-interest assets Justifications (26) Zero-interest assets refer to assets that generate no interest yield. A non-performing asset derives from a breach of contract, whereas a zerointerest asset is based on an agreement between the supervised entity and the debtor. 4.7 Below-market rate assets Justifications (27) Assets yielding an interest in excess of 0.01%, with a zero or negative marginal, are referred to as below-market rate assets. Lending priced according to an equivalent deposit shall not be entered as below-market rate assets.

12 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (12) 5 REPORTING TO THE FINANCIAL SUPERVISION AUTHORITY 5.1 Contents of the report (1) The reporting standard applies to information that serves to monitor the credit risk of the supervised entity. The reports are referred to as Nonperforming assets and zero-interest assets (J tables) and State of the banking system (S tables). The J tables include information on the supervised entity's non-performing assets, zero-interest assets and impairment losses, while the S tables include the same information broken down by sector and branch. (2) The information shall be reported in accordance with Stage 2 (Virati 2) of the standardised data collection procedure of the authorities, and in a manner more closely specified in the data collection files. Statistics Finland, the Bank of Finland and the Financial Supervision Authority have jointly approved and provided supervised entities with Stage 2 data collection files. (3) The Financial Supervision Authority may, upon application, exempt a branch of a foreign credit institution with deposit bank operations in Finland from the obligation to report the state of the banking system (S) to the Financial Supervision Authority if lending is limited. 5.2 Banks reporting directly to the Financial Supervision Authority (4) Commercial banks, foreign branches of deposit banks and branches of foreign credit institutions with deposit bank operations in Finland must submit the information referred to in 5.1 above directly with the Financial Supervision

13 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (13) Authority. (5) Savings banks, local cooperative banks and limited liability savings and cooperative banks must submit their credit risk information directly with the Financial Supervision Authority if reporting is not centralised. 5.3 Centralised reporting to the Financial Supervision Authority Savings banks (6) Savings banks submit the reports referred to in 5.1 above with the Savings Banks Inspectorate no later than the due date, unless the Financial Supervision Authority orders otherwise in the case of certain banks. The Savings Banks Inspectorate shall send the information on to the Financial Supervision Authority Member banks of the Amalgamation of cooperative banks (7) Member banks of the central institution as referred to in the Cooperative Banks' Act shall submit the reports referred to in 5.1 above only with the central institution by the due date, unless the Financial Supervision Authority orders otherwise in the case of some cooperative bank. The central institution shall send the information of the member banks on to the Financial Supervision Authority Local cooperative banks Recommendation (8) The Financial Supervision Authority recommends that local cooperative banks submit the reports referred to in 5.1 above with the Local Cooperative Bank Association. The Local Cooperative Bank Association shall send the information of all of these cooperative banks on to the Financial Supervision Authority. (9) If reporting is not centralised, local cooperative banks are required to submit the information in the requested format directly with the Financial Supervision Authority.

14 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (14) 5.4 Verification of reported data (10) Supervised entities are required to prepare a declaration on the accuracy of reported data. The purpose of the procedure is to ensure that the data submitted by the supervised entity to the Financial Supervision Authority is checked and accurate. The declaration shall be dated and signed by both the person preparing the report and the person verifying the data. The signed declaration form shall be kept by the supervised entity and presented to the Financial Supervision Authority on request. The declaration must be prepared for the first time for the reporting at 31 January The declaration shall be updated each time changes occur in the process it describes. (11) Reporting instructions, together with instructions on electronic reporting, are made available on the Financial Supervision Authority's website () under Regulations. (12) Continued reporting of incorrect data to the Financial Supervision Authority will lead to a written request to the supervised entity for clarification. In its reply the supervised entity shall present an action plan on how it will remedy the erroneous reporting. Failure to comply with this standard may lead to administrative or other sanctions.

15 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (15) 6 FURTHER DETAILS Please find the necessary contact information in the list of Persons responsible for standards provided on the FSA website. For further information, please contact: Credit Risk, tel

16 THE FINANCIAL SUPERVISION AUTHORITY until further notice assets J. No. 2/120/ (16) 7 OBSOLETE REGULATIONS (1) This standard revokes the following regulations: Regulation on reporting of non-performing and other zerointerest assets (Issued 28 December 2000, J. No. 1/331/2000). Regulation on reporting of non-performing and other zerointerest assets by members of the Amalgamation of cooperative banks (Issued 28 December 2000, J. No. 2/331/2000). Regulation on submission of annual accounts and relevant accounting information by credit institutions and their groups to the Financial Supervision Authority (Issued 27 January 1999, J. No. 18/420/98) insofar as the regulation applies to S tables. Regulation on submission of annual accounts and relevant accounting information by the Amalgamation of cooperative banks to the Financial Supervision Authority (Issued 10 January 2000, J. No. 1/420/2000) insofar as the regulation applies to S tables.

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Standard 4.7 Reporting of liquidity risk Regulations and guidelines How to read a standard A standard is a collection of subject-specific regulations and guidelines which both obliges and guides supervised