Brendan Burgess
Founder
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From the issued in March 2013
As is typical in a crisis, banks delay loan resolution in the hope of more favorable economic and property market conditions. In the meantime, the application of IRFS incurred loss model has facilitated banks recognizing their loan losses at a slower pace than under other accounting regimes. It has also taken time to strengthen inadequate operational capacity to deal with distressed assets, and banks experience difficulties engaging with some borrowers, in part reflecting protections under the Code of Conduct on Mortgage Arrears (CCMA). Personal insolvency reforms that were recently completed had earlier posed uncertainties for banks about appropriate resolution strategies; more recently, with these reforms nearing implementation, a group of banks has adopted a multilender coordination protocol which could help resolve arrears cases without deploying the personal insolvency framework. Finally, there are also concerns that loan modifications entailing principal reductions could stimulate strategic defaults, with such concerns heightened by impediments to initiating repossession proceedings.
20. Accordingly, the authorities are committed to wide-ranging actions to ensure decisive progress in resolving distressed assets in 2013 Targets for durable loan restructuring are supported by steps across consumer protection arrangements, reforms of repossession procedures, and implementing the recently enacted personal insolvency reforms:
. As a first step, the CBI is engaging with banks to ensure key inputs for provisioning of loans, especially modified loans, are appropriately prudent. Taking into account an assessment of the application of the current guidelines, the CBI will then update the guidelines, where necessary, setting out clear definitions and principles underpinning bank‘s provisioning models. In the context of their ongoing efforts to strengthen financial supervision the authorities have also requested an external Basle Core Principles assessment (structural benchmark from the 8th review) that will be carried out during the second half of 2013.
19. A range of factors have hindered durable resolution, but the authorities recognize that there is a need to address unsustainable debts to avoid further delaying the domestic economic recovery.
As is typical in a crisis, banks delay loan resolution in the hope of more favorable economic and property market conditions. In the meantime, the application of IRFS incurred loss model has facilitated banks recognizing their loan losses at a slower pace than under other accounting regimes. It has also taken time to strengthen inadequate operational capacity to deal with distressed assets, and banks experience difficulties engaging with some borrowers, in part reflecting protections under the Code of Conduct on Mortgage Arrears (CCMA). Personal insolvency reforms that were recently completed had earlier posed uncertainties for banks about appropriate resolution strategies; more recently, with these reforms nearing implementation, a group of banks has adopted a multilender coordination protocol which could help resolve arrears cases without deploying the personal insolvency framework. Finally, there are also concerns that loan modifications entailing principal reductions could stimulate strategic defaults, with such concerns heightened by impediments to initiating repossession proceedings.
20. Accordingly, the authorities are committed to wide-ranging actions to ensure decisive progress in resolving distressed assets in 2013 Targets for durable loan restructuring are supported by steps across consumer protection arrangements, reforms of repossession procedures, and implementing the recently enacted personal insolvency reforms:
- The CBI will establish by end-March a target requiring banks to offer a substantial share of restructuring arrangements during 2013 (proposed structural benchmark) (MEFP ¶5). A target for completing such arrangements during 2013 will be set subsequently, prior to the completion of the 11th review. Critically, the CBI will monitor each bank‘s progress closely, including by auditing samples of loan modifications to ensure they can be expected to durably address arrears.
- The CBI will also modify the CCMA by end-June, where appropriate to facilitate effective engagement with mortgage borrowers in arrears (MEFP ¶6). The CBI intends to review in particular (i) the restrictions on contacts to facilitateconstructive engagement, where it recently provided a clarification; (ii) amending the definition of non-cooperating borrowers to ensure protections are limited to borrowers where engagement is timely and consistent with addressing their arrears; and (iii) the current protection on tracker mortgages, specifically in cases where a borrowers is offered an alternative arrangement that is advantageous in the long-term. Staff considers a thorough review of the CCMA appropriate as the emphasis shifts from forbearance to resolution, and notes in particular the need to ensure unsecured lenders are not advantaged in collections.
- To facilitate durable resolution results, the authorities will also ensure that repossession procedures work efficiently in practice (MEFP ¶7). Repossessions declined in recent years despite the rise in arrears. The authorities remain committed to remove unintended constraints through legislative amendments to be submitted to parliament by end-March (MEFP ¶12, eighth review), with a view of passing them into law by around mid-year. This step is important to facilitate the funding needed for a renewal of mortgage lending on reasonable terms, and it will also facilitate conclusion of agreements to modify a loan and help ensure they are lasting solutions, while containing the risk that such modifications reduce payments by borrowers that can afford to pay. In addition, the authorities will keep repossession experience under review, and quickly bring forward appropriate measures to address any problems regarding the length, predictability, and cost of proceedings; Box 4 outlines some potential steps. Staff noted the need for prudential policies on banks‘ property management and vendor financing to facilitate reasonably timely disposal of property while avoiding market disruption.
22. By end-May, the CBI will update the 2011 Impairment Provisioning and Disclosure Guidelines (proposed structural benchmark), which will give further momentum to durable restructuring efforts
. As a first step, the CBI is engaging with banks to ensure key inputs for provisioning of loans, especially modified loans, are appropriately prudent. Taking into account an assessment of the application of the current guidelines, the CBI will then update the guidelines, where necessary, setting out clear definitions and principles underpinning bank‘s provisioning models. In the context of their ongoing efforts to strengthen financial supervision the authorities have also requested an external Basle Core Principles assessment (structural benchmark from the 8th review) that will be carried out during the second half of 2013.