71. The existence of differences in the ways that banks in different countries account for loans, as well as the degree of judgement that their managements use make it particularly important that the banks make adequate disclosures ³⁶. These disclosures should be clearly linked to the recognition and measurement principles. This section presents sound principles on disclosure focusing on the credit risk of the loan portfolio. These recommendations are in line with the broad direction in the Basle Committee's recently released paper on Enhancing Bank Transparency.
72. Users of a bank's financial reports need information on the institution's credit risk exposure and risk management practices, the quality of the loan portfolio, its profitability and the impact of losses on the financial position and performance of the bank. Disclosure in a bank's annual financial report should include clear and concise information on the matters discussed below. These disclosures should be adapted to the size and nature of the bank's operations in accordance with the materiality concept (discussed in section 2). Thus, an institution may not necessarily provide all the disclosures recommended below if a particular disclosure item is not relevant to the assessment of the bank. On the other hand, banks relying on capital markets and larger institutions with complex operations, such as those with significant international operations, would generally be expected to make more extensive disclosures.

73. Institutions should be encouraged to provide as much of the information listed below as possible in audited financial statements, i.e., primary financial statements and supporting notes. In particular, disclosure of accounting policies should be in the audited part of the financial report. As an exception, information on risk management and control policies and practices and methods to determine specific and general allowances adopted by the bank relating to credit risk may be disclosed in the unaudited part of the financial report, e.g., in management's discussion and analysis.
    14. A bank should disclose information about the accounting policies and methods followed to account for loans and the allowance for impairment.

74. A bank should give information about all significant accounting policies for the accounting for loans, loan impairment and related allowances (including the accounting for the effects of changes in those policies), and the methods employed to apply those policies. It should disclose information about its policies for:
    • basis of measurement for unimpaired loans at their initial recognition and subsequently;
    • income recognition on unimpaired loans (e.g., effective interest rate method);
    • determining how and when to recognise impairment in a loan and the basis of measurement for impaired loans;
    • determining allowances (specific and general);
    • determining when loans are considered past-due for accounting and disclosure purposes (number of days in arrears);
    • charging off loans;
    • accounting for recoveries;
    • determining when to cease accruing interest on a loan;
    • how it recognises income from impaired loans, including interest recognition and the treatment of fees and expenses.

75. The above list should not be considered to be exhaustive. Examples of other items and circumstances that may necessitate separate disclosure of accounting policies include the following:
    • country risk provisioning;
    • securitisation transactions where there is a continuing interest in, or involvement with, the securitised loans;
    • premiums or discounts on loans acquired from third parties;
    • hedging relationships affecting the measurement of loans;
    • loans held-for-sale (where applicable).
    15. A bank should disclose information on methods used to determine specific and general allowances and key assumptions used.

76. A bank should explain the methods it has employed to calculate specific and general allowances. It should disclose the key assumptions used, such as how it has considered historical default experience for different categories of loans, current conditions, changes in portfolio composition and trends in delinquencies and recoveries. Moreover, it should disclose information about any other relevant factors, e.g., the existence and effect of concentrations of credit and changes in the level of such concentrations, changes in the operating environment of borrowers and changes in lending policies and procedures including underwriting standards and collection and recovery practices.
    16. A bank should disclose information on the risk management and control policies and practices adopted by the bank relating to credit risk of the loan portfolio.

77. A bank should disclose a description of its objectives and strategies in managing and controlling credit risk in the loan portfolio ³⁷. This disclosure should include relevant information about the bank's risk management and control policies and practices to mitigate credit risk, such as the policies and practices for:
    • requiring collateral and guarantees;
    • periodic review of loans and collateral;
    • credit risk classification systems (loan grading systems);
    • organisational structure for managing credit risk (e.g., credit committees);
    • monitoring overdue credits;
    • limiting and controlling exposures;
    • reducing exposures through legally enforceable netting arrangements; and
    • the use of credit derivatives and credit insurance.
    17. A bank should disclose geographical information about loans, impaired loans and past due loans including the related amount of specific and general allowances.

78. A bank should disclose its domestic and international loans, and the allocation of the allowance for these categories of loans. It should provide further breakdown (in line with the materiality principle) of the amount of domestic and international loans by relevant geographic region, indicating sovereign loans separately, and where appropriate, by country within region. Additional information about the amount of impaired and past due loans by region should also be disclosed. If practical, a bank should also disclose the amount of specific and general allowances relating to each geographic region.
    18. A bank should disclose balances of loans, impaired loans and past due loans by major categories of borrowers and the amounts of specific and general allowances established against each category.

79. A bank should disclose information about the composition of the loan portfolio based on a meaningful categorisation of borrowers (e.g., commercial loans, consumer loans, related parties). For each major category of borrowers and for the overall loan portfolio, there should be separate disclosure of:
    • total loans, before and after allowances;
    • total impaired loans, showing separately those that are past-due (e.g., 90 days or more); ³⁸
    • unimpaired past-due loans (e.g., 90 days or more);
    • specific allowances;
    • general allowances.

80. If there is a portion of the general allowance that is not allocated to a major category of borrowers, the amount of the unallocated allowance should be disclosed separately. Institutions are encouraged to disclose other meaningful measures of deterioration of credit quality in the loan portfolio.

81. A bank should disclose commercial loans by significant industry sector (e.g., real estate, mining).

82. It can be also appropriate to give summary information about the composition of the loan portfolio categorised by type of loan (e.g., mortgage loans, credit card loans, finance leases), type of collateral (e.g., residential property, commercial property, government guaranteed, unsecured) and/or creditworthiness (e.g., based on internal or external ratings).
    19. A bank should disclose information on significant concentrations of credit risk.

83. Significant concentrations of credit risk can arise in relation to individual borrowers, related borrowers or groups of borrowers, a particular economic sector or a particular country or region. Loans are grouped so that loans with similar characteristics in terms of credit risk and that can be expected to be affected similarly by changes in economic or other conditions are classified together, e.g., to particular industrial sectors. A bank should disclose its policy for determining concentrations and for each concentration disclose a description of the shared characteristics that identify the concentration and the magnitude of the exposure. These disclosures should be designed in a way that is consistent with any confidentiality requirements.
    20. A bank should disclose balances of loans where the accrual of interest in accordance with the terms of the original loan agreement has ceased because of a deterioration in credit quality.

84. A bank should disclose information about balances of non-accrual loans and the impact that non-accrual of interest has on its income statement ³⁹.
    21. A bank should disclose a reconciliation of movements in the allowance for loan impairment ('continuity schedule') showing separately various types of allowances.

85. A bank should disclose the details of the movements in allowances during the period separately for specific allowances and general allowances. The information should indicate:
    • the opening balance of the allowance;
    • charge-offs (or write-offs) during the period;
    • recoveries of previous charge-offs (or write-offs) during the period;
    • amounts set aside (or reversed) for estimated probable loan losses during the period;
    • any other adjustments to the allowance (e.g., exchange differences, business combinations, acquisitions and disposals of subsidiaries); and
    • closing balance of the allowance.

86. Charge-offs and recoveries that have been recorded directly in the income statement should also be disclosed.
    22. A bank should disclose balances of and other information about loans that have been restructured during the year.

87. A bank should disclose information about the magnitude and nature of the grants and concessions that it has made on troubled restructured loans. The method used to measure the reduction in the recorded investment in a restructured loan should also be disclosed. If full repayment is expected, the restructured loan need not be disclosed after performance for a reasonable period in accordance with the modified terms.
    23. A bank should disclose contractual obligations with respect to recourse arrangements and the expected losses under those arrangements.

88. Recourse arrangements are transactions where a bank is liable for payment on a loan in the event the borrower defaults, e.g., because it has sold the loan to a third party with a guarantee. These arrangements may expose a bank to significant credit risk, but are often not recognised on the balance sheet.

Footnotes:

36. For example, the use of charge-offs in some countries versus specific allowances in others under similar circumstances leads to significant difficulties in comparing banks across countries. In countries where charge-offs are used to a larger extent, impaired and non-performing loans as a percentage of the loan portfolio (and of total allowances) tends to be much lower than in countries where specific allowances are used.

37. Given that institutions incur credit risk from different kinds of activities (including lending, trading and investment activities), it may be appropriate to disclose risk management and control policies relating to the loan portfolio as a part of the disclosure of overall risk management and control policies and practices.

38. Institutions are encouraged to provide an ageing analysis of past-due loans (30-89 days, 90-179 days, 180 days or more).

39. As discussed in the section on income recognition, banks in some countries accrue interest on impaired loans and set aside specific allowances for the full amount of interest being accrued.