Credits are usually classified into four types: one is normal; Anor is one who is in special surveillance because he has increased his risk, wher for his debt, for bad results, for delays of more than 30 days or or motives. Thirdly, in higher degree of risk is doubtful, which can enter by default of more than 90 days or for continued losses, generalized delays, refinancings and or doubts about ir possibilities of payment. And in last stadium is failed, that considered irretrievable and withdraws from balance sheet when it has already been fully provisioned after having been as delinquent for at least two years.Learn More
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So far, normal credit was prudent for a small provision or loss already pointed out in banks ' balance sheet. This coverage increased in case of special surveillance, for being at risk. And in case of a doubtful loan, it had to be provided according to type of credit and as time of default was increasing until it was fully covered within 21 months from first default.
Under new legislation that enters into force on January 1, way to prepare se coverages changes. Normal credits have to incorporate possibility of a loss in next twelve months. And those of special vigilance and defaulters have to contemplate probability of a loss and ir amount throughout life of credit. In case of normal and doubtful, re will be much change in amounts to be provided to meet legal requirements of provisions. But for special surveillance credits this means that provisions will have to be raised considerably.13% Extra Provisions
According to surveys of European Banking Authority (EBA), this regulation will result in an increase in provisions of 13% of average in large European bank. These endowments will have to be made by decreasing reservations at time of entry into force. Capital levels will deteriorate. According to EBA, some 45 basic points on average. That is, banks will lose 10% of quality capital requirements. Because se capital ratios are calculated on risk-weighted assets, in principle it would cause banks to eir collect more capital from market or reduce ir risk assets, i.e. ir credit. However, in order to avoid it, regulation grants a period of five years for this loss of reserves to be transferred to levels of regulatory capital. And that should soften blow a lot.
"Although re is an investment bank that calculates something else, expected impact is little in Spain," emphasizes financial analyst Carmelo Slash. Sources of Bank of Spain believe it is assumable and can be in line with foresight anticipated by EBA. In small credits provisions in groups will be calculated. And in large loans, basically higher than 3 million euros, you will look one by one.
Large banks will be able to calculate ir expected losses with ir own statistical models based on behavior of ir different types of credit portfolios. To ensure quality of se models, Bank of Spain explains that it will oversee it, compare it with a calendar of alternative provisions that it has devised for small entities and compare it with means that result. In addition, entities will have to address a backtesting, that is, a check of how se models have actually behaved. "In end it is to give a more accurate valuation reflecting all information available," explains Rubén Manso, Inspector of Bank of Spain in leave and founding partner of Mansolivar.Questions about Supervision
However, this new model receives two criticisms: one that is procyclical. Or what is same: by worsening economy, it will immediately compel to reflect that and raise more provisions, refueling negative trend. On or hand, even if Bank of Spain supervises it, analysts point out that re may be some degree of arbitrariness in models of big banks. Perhaps that is why ECB is pushing for a fixed timetable in which all dubious appropriations are provisioned to 100%. The Italians have resorted to European Parliament to stop this initiative by arguing that Eurobanco is overturned by financial regulation and non-supervision. And ECB has replied that in any case it will publish how entities follow this timetable. which will raise pressure of market to do it equally.
As of January 1, all provisions will be charged against profit and loss account as previously made. But by providing more for special surveillance re will be a certain correction of dividends. In general, experts point out that a healthier bank requires more capital, and that capital must be Retribuirlo, which means in turn that it will raise margin of intermediation by transferring cost of this regulation to customers. "It is No longer an increase in solvency requirements that will adversely affect granting of credit to private sector," explains Manso. However, this restriction will happen in a context in which rates are low and where process of indebtedness continues, so what experts according to impact won't be so serious.