• BANK Part 4.7 BANK Part 4.7 Provisioning

    • BANK 4.7.1 Provisioning

      Provisioning means setting aside an amount to cover expected losses on special mention credits, impaired credits and other problem assets, based on loan-loss probability. Provisioning is made before profit is earned.

      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 4.7.2 Policies — provisioning

      Depending on the nature, scale and complexity of a banking business firm’s business, and of the credit it provides, the firm’s provisioning policy must set out:

      (a) the areas of its business to which the policy applies;
      (b) whether the firm uses different approaches to those areas, and the significant differences in approach;
      (c) who is responsible for regularly monitoring its assets, to identify problem or potential problem assets, and the factors it takes into account in identifying them;
      (d) the extent to which the value of any collateral, guarantees or insurance that the firm holds affects the need for, or the level of, provisions;
      (e) the basis on which the firm makes its provisions, including the extent to which their levels are left to managerial judgement or to a committee;
      (f) the methods, debt management systems or formulae used to set the levels of provisions and the factors that must be considered in deciding whether the provisions are adequate;
      (g) the reports to enable the firm’s governing body and senior management to ensure that the firm maintains adequate provisions;
      (h) the procedures and responsibilities for arrears management and the recovery of exposures in arrears or exposures that have had provisions made against them;
      (i) the procedures for writing off and writing back provisions; and
      (j) the procedures for calculating and making provisions for contingent and other liabilities (such as contingent liabilities that have crystallised from acceptances, endorsements, guarantees, performance bonds, indemnities, irrevocable letters of credit and the confirmation of documentary credits).
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.7.3 Making provisions

      (1) A banking business firm must ensure that the firm maintains provisions that, taken together, are prudent, reasonable and adequate to absorb credit losses, given the facts and circumstances. The losses covered must include losses incurred, losses incurred but not yet reported, and losses estimated but not certain to arise, extending over the life of the individual credits that make up its credit portfolio.
      (2) The firm must also ensure that provisions and write-offs are timely and reflect realistic repayment and recovery expectations, taking into account market and macroeconomic conditions. The firm must consider all the significant factors that affect the likelihood of collecting on the transactions that make up its credit portfolio and the estimated future credit losses on those transactions.
      (3) The firm must make provisions that in total at least meet the requirements in table 4.7.3.

      Table 4.7.3 Provisioning requirements

      column 1 item column 2 category column 3 minimum provisioning requirement (% of the unsecured part of the credit)
      1 performing 0
      2 special mention 5
      3 substandard 20
      4 doubtful 50
      5 loss 100
      (4) Provisions may be general (assessed collectively against the whole of a portfolio) or specific (assessed against individual credits), or both.
      (5) The firm must take into account off-balance-sheet exposures in its categorisation of credits and in provisioning.

      Note There are 2 types of off-balance-sheet exposures: those that can be unilaterally cancelled by the firm and those that cannot. No provisioning is necessary for the former.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 4.7.4 BANK 4.7.4 Review of levels

      The levels of provisions and write-offs must be reviewed regularly to ensure that they are consistent with identified and estimated losses.

      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.7.4 Guidance

        1 A review of a firm's write-offs can help identify whether the firm's provisioning policy results in over-provisioning or under-provisioning.
        2 The Regulatory Authority regularly assesses trends and concentrations in risk and risk build-up across financial entities in relation to problem assets. In making the assessment, the authority takes into account any observed concentration in the CRM techniques used by firms and the potential effect on the efficacy of those techniques in reducing loss. The authority would consider the adequacy of provisions for a firm (and the industry in general) in the light of the assessment.
        3 The Regulatory Authority might seek the opinion of external experts in assessing the adequacy of a firm's policies for grading and classifying its assets and the appropriateness and robustness of the levels of its provisions.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.7.5 No circumventing of requirements

      A banking business firm must not restructure, refinance or reclassify assets with a view to circumventing the requirements on provisioning.

      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.7.6 Authority can reclassify assets

      (1) The Regulatory Authority may at any time require a banking business firm to demonstrate that the firm’s classification of its assets, and its provisions, are adequate for prudential purposes.
      (2) The Regulatory Authority may require the firm to reclassify its assets or increase the levels of its provisions if the authority considers that the asset classifications are inaccurate, or the provisions are inadequate, for prudential purposes.

      Example

      If the Regulatory Authority considers that existing or anticipated deterioration in asset quality is of concern or if the provisions do not fully reflect expected losses, the authority may require the firm to adjust its classifications of individual assets, increase its levels of provisions or capital and, if necessary, impose other remedial measures.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.7.7 Information to governing body

      (1) A banking business firm’s governing body must obtain timely information on the condition of the firm’s assets, including the classification of assets, the levels of provisions and problem assets.
      (2) The information must include summary results of the latest asset review, comparative trends in the overall quality of problem assets, and measurements of existing or anticipated deterioration in asset quality and losses expected.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).