Yes. In our opinion, this separate presentation improves the consistency between POCIs presentation and measurement within the FINREP reporting package, considering that the measurement of POCIs differs from the measurement of financial assets in Stage 2 or Stage 3, irrespective of whether they are still credit-impaired or not anymore at the current reporting date. Additionally, this separate presentation improves the consistency between POCIs presentation in the FINREP reporting package and in the IFRS financial statements of the reporting entity.
At the same time, please consider the adequacy of potentially inserting a separate POCI-dedicated linear section also within the off-balance section of the template F12.01 (“Total provisions on commitments and financial guarantees given”). While admitting that IFRS 9 introduces the POCI concept only as an attribute of “financial assets” (hence: of on-balance exposures), we nevertheless believe that, when financial instruments are deemed credit-impaired upon their initial recognition, it can be that some or even all of the related credit risk exposure is not yet on-balance (that is: disbursed) already at that date. Hence, in our view, it could make sense that the requirement of presenting the POCIs outside the three stages in the template FIN 12.01 is extended to also cover the off-balance section of this template. Alternatively, it would be useful to clarify in which of the existing rows (Stage 2 or Stage 3) the movements in the credit loss allowances recognized in respect of such off-balance components shall be reported, potentially depending on whether the related customer is still in default or not anymore at the reporting date
Not fully. As per our understanding of the related draft instructions (Annex V.215), the entity shall report as “non-performing” the POCIs that are still “credit-impaired” (as defined in Appendix A of IFRS 9) at the current reporting date. Also, the entity shall report as “performing” the POCIs that are no longer “credit-impaired” at the current reporting date, provided that all the conditions set out in the Article 47a (4) or (6) of the CRR (as amended by the EU Regulation 2019/630/17.04.2019) are also met at that date. If this understanding is correct, it is not fully clear to us under which category (“non-performing” or “performing”) the entities shall report the POCIs that both (i) are assessed as no longer “credit-impaired” at the current reporting date and (ii) don’t meet all the conditions set out in Article 47a (4) or (6) of the CRR. For instance, POCI assets that are no longer rated “defaulted” at the current reporting date but the obligor still has some amount - lower than the materiality threshold internally set for triggering the 90 DPD default criterion - past due by more than 90 days and having fallen overdue after the date on which forbearance measures were granted. Or, less than one year has passed since the date on which the forbearance measures were granted or the date on which the exposure was classified as non-performing, whichever is later. Alternatively, it may not be necessary to distinguish whether the POCIs are credit-impaired at the current date: in accordance with IFRS 9, the credit-impaired status is relevant at initial recognition of POCI only and subsequently no further tracked. Therefore, from an IFRS perspective, this criterion seems to be redundant. As a result, it may be sufficient to distinguish “non-performing” and “performing” POCIs only based on the regulatory criteria in CCR.
As already hinted in the last part of the answer above, we believe that it might be an unnecessary complication to mix the terms “credit-impaired” and “non-performing” for distinguishing between the two POCI sub-populations to be reported in F18, having also in mind that the new regulation harmonizes the definitions of “non-performing” and respectively “default”.
No particular challenges are foreseen in addressing this new requirement, except for the possible technical difficulties in fully capturing the related credit loss allowance movements given the potentially very short contractual maturity (hence: the potentially very intensive turnover) of such exposures within any given current reporting period.
For the same reason, it could be that the figures reported in the columns “Increases due to origination” and “Decreases due to de-recognition” end up unnecessarily inflated (without any other movements being reported), e.g. in respect of overnight deposits with central banks and other credit institutions, which could be originated and de-recognized on a daily basis and in large volumes. One possibility to avoid such an overstatement could be to request entities to derive the net difference between reporting period’s opening and closing related credit loss allowance balances (separately per each stage), then report it either in the column “Increases due to origination” (if adverse) or in the column “Decreases due to de-recognition” (if favourable). Such an approach would also reflect a reasonable expectation that the credit risk associated to such exposures (against central banks and other credit institutions) is unlikely to change significantly in between the date of origination and the date of de-recognition (contractual maturity).
Otherwise, we believe that, indeed, by including cash balances at central banks and other demand deposits into the scope of the template F12.01, increased consistency and cross-checking possibilities will be achieved in between, on the one hand, F12.01 and F12.02 and, on the other hand, F18 and F19. In the same time, strictly from a F12.01 perspective, the additional informative value will be rather limited, given that all or most of such exposures are typically allocated to Stage 1 and the related credit loss allowances are very small (relative to the underlying exposures).
At the first sight, one might observe some inconsistency arising from the fact that “cash balances at central banks and other demand deposits” are newly included as a separate linear category in F12.01 (distinctly for each Stage except the newly introduced POCI “stage”), but not in F12.02. One could argue that this inconsistency is justified by not expecting such exposures to change Stage throughout their contractual life, within any given reporting period. However, this argument seems somehow undermined by the updated F12.01 separately collecting the movements in the related credit loss allowances for each Stage (except POCI).
Also, one can observe that, while proposed to be considered in F12.01, cash balances at central banks and other demand deposits would continue to stay outside the scope of F4.3.1/F4.4.1. It means that, inevitably, closing balances of credit loss allowances reported in the former will not reconcile against the accumulated impairments reported in the latter.
We see one potential challenge resulting from the fact that, for the purpose of addressing FIN 12.02, for the reporting entity it is currently sufficient to collect the stage information of the relevant exposures at the two ends of the reporting period, irrespective of how they might have further changed their stage in between. But this new requirement would imply that the stage information would need to be collected and stored continuously throughout the reporting period, so that the “direct” transfers in between the Stages 1 and 3 are distinguished from the “indirect” ones (i.e. those involving a transit through Stage 2).
Additionally, please clarify whether the more particular cases, e.g. the ones described below, would fall in the scope of the would-be newly inserted columns dedicated to direct transfers in between the Stages 1 and 3:
• An exposure is transferred as follows during the reporting period: Stage1->Strage3->Stage2->Stage3. Would this exposure fall in the scope of the sub-column “Direct transfer to Stage3 from Stage1”?
• An exposure is transferred as follows during the reporting period: Stage3->Stage2->Stage3->Stage1. Would this exposure fall in the scope of the sub-column “Direct transfer to Stage1 from Stage3”?
Furthermore, we are of the opinion that the terms “direct transfer” or “without any intermediate passage” can take different meanings (and hence result in different outcomes) depending on the frequency of the impairment assessment process in the reporting entity. For instance, if a SICR (Stage 2) trigger and a credit-impairment (Stage 3) trigger occur both within the same month, the related deal would not be deemed a “direct transfer to Stage 3 from Stage 1” by an entity having a daily frequency of the impairment assessment process, but it would be deemed a “direct transfer to Stage 3 from Stage 1” by an entity having a monthly frequency of the impairment assessment process. This further means that a group including entities with different frequency set-ups of the impairment assessment process would inevitably report inconsistent consolidated figures in these newly proposed columns of FIN 12.02, given that deals behaving identically in respect of credit risk dynamics (and maybe even having the same counterpart) would be reported in different sections of the table, which might result into a misleading overview of inter-stage consolidated exposure transfers in the reporting period.