Implementing Calendar Provisioning: rules and impacts
Calendar provisioning (“CP”) is one of the most disruptive and challenging supervisory measures in recent years.
Introduced in March 2018 by the ECB through its “Addendum to the guidance on non-performing loans” (“NPLs”), the new rules provide that NPLs be subject to minimum loss coverage requirements, depending on the time elapsed since default, to be achieved through write downs or deductions from regulatory capital. CP has been originally designed as a system of “supervisory expectations” under Basel’s Pillar 2, which are non-binding and subject to change in the context of the “dialogue” between supervisors and supervised institutions, although the Single Supervisory Mechanism (SSM) aims to apply them in a rigorous, uniform manner.
The mechanism, originally meant to apply only to loans defaulting after April 2018, was extended in July 2018 – through an SSM communication – to preexisting NPLs, which would also be subject to full coverage by 2026 (although based on different time-frames for individual banks, to be defined in their annual Supervisory Review and Evaluation Process, or SREP). Furthermore, in April 2019, European Regulation 2019/630 amended Regulation 575/2013 (the “capital requirements regulation”, “CRR”) by introducing a mandatory calendar provisioning system (known as “backstop”), which dictates Pillar 1 requirements for loans granted after the measure came into force.
The minimum loss coverage required by calendar provisioning is based on a faster time frame than the average recovery procedures in some European countries. This difference may be significant for some facility types and euro area regions, where riskier loan portfolios are combined with less efficient judicial systems.
As a result, calendar provisioning may lead banks to perform larger/faster “writeoffs” (either through their P&L account and through capital deductions) than justified by past recovery experience. Such an additional burden – in terms of higher costs and reduced leverage – will ultimately impact the profitability of the lending business and/or the cost of credit for customers.
As they affect the viability of banks and the sustainability of investments, the changes brought by calendar provisioning must be managed, rather than just be passively experienced. In this sprit, this paper aims at providing an in-depth look at the current situation, and at possible future developments in the area of calendar provisioning.
This paper is based on the work of a technical committee of AIFIRM (Italian Association of Financial Industry Risk Managers), coordinated by Leonardo Bellucci and Andrea Resti, CRIF Senior Advisor and Associate Professor at Bocconi University in Milan, with the technical-organizational support of CRIF. CRIF would like to thank all the participants in the working group and AIFIRM for agreeing to this publication.