Policies on provisioning

(2) Depending on the nature, scale and complexity of a Bank’s business, and of the credit it provides, the Bank’s provisioning policy must set out:

• (a) the areas of its business to which the policy applies;
• (b) whether the Bank 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 Bank holds affects the need for, or the level of, provisions;
• (e) the basis on which the Bank 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 Bank’s Governing Body and senior management to ensure that the Bank 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).

Adequacy of Provisions

(3) A Bank must ensure that the Bank 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.

(4) The Bank 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 Bank 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.

(5) The Bank must make minimum provisions which meet the requirements in table 5 K.

Table 5 K Provisioning requirements

(6) Provisions may be general (assessed collectively against the whole of a portfolio) or specific (assessed against individual credits), or both. The Bank must take into account off-balance-sheet exposures in its categorisation of credits and in provisioning.

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

(8) A Bank must not restructure, refinance or reclassify assets with a view to circumventing the requirements on provisioning.

(9) The AFSA may at any time require a Bank to demonstrate that the Bank’s classification of its assets, and its provisions, are adequate for prudential purposes.

(10) The AFSA may require the Bank to reclassify its assets or increase the levels of its provisions if the AFSA considers that the asset classifications are inaccurate, or the provisions are inadequate, for prudential purposes.

(11) A Bank’s Governing Body must obtain timely information on the condition of the Bank’s assets, including the classification of assets, the levels of provisions and problem assets. 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.