ATTACHMENT I: Banking Definitions25
Accrued interest: interest due but not paid for less than 90 days. Gross of provisions.
Allocated provisions: specific reserves set by banks by applying specific weights to credits according to their risk classification (2 percent for A; 10 percent for B; 25 percent for C; 50 percent for D and 100 percent for E).
Capital (owned funds): common and preferred shares, general banks’ reserves, revaluation reserves and undistributed profits. Net of uncovered losses and unallocated specific provisions identified by the NBM’s Banking Supervision Department.
Credit to banks: regular and nonperforming loans and other claims to domestic and foreign banks, gross of provisions.
Credit to nonbanks: regular and nonperforming loans to private and public enterprises, households and other customers, gross of provisions. Includes short- and long-term denar and foreign currency loans.
Classified exposure: credit exposure classified under Substandard, Doubtful and Loss Risk category.
Credit risk classification: NBM classifies credit risk into five categories from A to E, which correspond to Pass (A), Watch (B), Substandard (C), Doubtful (D) and Loss (E). Classification is based on objective and subjective criteria including the amount of time loans have been overdue (A,15 days; B, from 16-60 days; C, from 61-150 days; D, from 151-365 days and E, more than 365 days or without recovery).
Credit exposure: regular and nonperforming loans, accrued interest, other claims and off-balance-sheet credit exposure that entails credit risk.
Guaranty capital: capital adjusted by current profit (50 percent) and other long-term securities, net of current losses and capital investments.
Liquid assets: cash, claims, and securities rediscounted by the NBM; debt securities and accounts with domestic and foreign banks.
Minimum capital requirement: based on paid-in capital. Since April 1999, the NBM’s Banking Supervision Department requires banks to adjust the amount of paid-in capital by deducting unallocated specific provisions, uncovered losses and requests for capital increases not yet approved by the NBM.
Net loans: regular and nonperforming loans to nonbanks, net of provisions.
Nonaccrual interest: interest overdue more than 90 days.
Nonperforming loans: principal of loans classified as Doubtful and Loss and principal of loans for which interest payment has been overdue more than 90 days.
Off-balance-sheet items: covered and uncovered letters of credit and guarantees, performance guarantees, credit commitments, and other uncovered off-balance-sheet items.
Off-balance-sheet credit exposure: uncovered off-balance-sheet items.
Paid-in capital: common and preferred shares and general banks’ reserves paid-in in money form, adjusted by annual reports.
Provisions: allocated provisions on credit to nonbanks and banks; unallocated specific provisions and provisions for nonaccrual interest.
Unallocated provisions: provision shortfall identified by the NBM’s Banking Supervision Department.
Regular loans: principal of loans (including overdue) other than nonperforming loans.
Risk-weighted assets: risk-weighted on-and off-balance-sheet assets net of uncovered and current losses, capital investments and unallocated specific provisions.
On-balance-sheet items and their risk-weighting is as follows:
-cash, deposits with NBM and gold (0 percent risk);
-claims on NBM and on Government (0 percent);
-claims secured or guaranteed by NBM and Government (0 percent);
-claims covered with cash (0 percent);
-claims on domestic and foreign banks (20 percent);
-precious metals (20 percent); and
-all other assets (100 percent).
Off-balance-sheet items and their risk-weighting is as follows:
-covered letters of credit and guarantees (0 percent risk);
-performance guarantees to nonbanks (20 percent);
-credit commitments to nonbanks (50 percent); and
-uncovered letters of credit and guarantees and other off-balance- sheet items to nonbanks (100 percent).
Performance guarantees, credit commitments, and uncovered off-balance-sheet items to banks (20 percent of risk-weighting for each asset).
Short-term liabilities: deposits and borrowings up to one year. Includes denar and foreign currency liabilities.
ATTACHMENT II: Measuring the Systemic Risk of Interbank Exposures
Define a banking system with n banks, of which, m are troubled banks. Define a matrix A where aij is the logarithmic transformation of Aij, the share of bank i’s loans to troubled bank j as a percentage of that bank i’s total loan portfolio (if one sound bank lends 10 percent and 15 percent of its bank portfolio to two troubled banks, then Aij is 0.1 and 0.15 respectively). Using data from the interbank market, define a matrix W where wij for i=1 to n and j=1 to in, is the share of sound bank i’s loans to troubled bank j as a percentage of total interbank loans to troubled bank j (If 10 sound banks lend to 5 troubled banks and each sound bank i lends 10 percent to each troubled bank, then Wij is 0.1 for each i and j).
Then, define the matrix S = A’W where A’ is the transposed matrix A. The matrix S has dimension m*m with indexes sj, j=1 to in, where each index Sj is the weighted share of each sound bank’s lending to each troubled bank as a percentage of the sound bank total loan portfolio. Define an index of interbank exposure (IE) as Tr(eSj). The impact of potential banks’ failures on banks that lend to troubled banks is greater, the closer IE is to 1. The closer IE is to zero, the lower the impact on lending banks.
Prepared by Paulo Drummond.
According to the Banks and Savings Houses Act and NBM Regulations. Some terminology may differ from standard usage.
The minimum capital requirements for domestic operations are, respectively, DM 6 million by end-April 2000 and DM 7 million by end-April 2001.
The third largest bank accounted for 5 percent of total banking system assets.
At end-September 1999, six banks had exposure to a single shareholder in excess the prudential limit.
Held by residents and non-residents.
On- and off-balance sheet items, excluding provisions for loan losses, and without risk weighting.
The increase in banks’ assets could be overstated, owing to possible inaccuracies and misclassification of accrued interest.
Paid on three-month deposits.
In December 1998, Stopanska Banka reprogrammed dinar 6 billion, equivalent to 7 percent of banking system assets, reclassifying “other assets” into “credit to enterprises.”
At end-September 1999, foreign currency credit was equivalent to 13 percent of the banking system assets.
The ratio could be larger if security held as cover for letters of credit and guarantees entails risk.
Interest income minus interest expenses, as per banks’ balance sheets.
Verification of collateral is part of the regular on-site inspections by the Bank Supervision Department of the National Bank.
Since September 1998, the Banking Supervision Department has started disclosing the amount of unallocated provisions, by banks.
Including Stopanska Banka. Includes off-balance sheet items.
Equivalent to less than 2 percent of total banking system assets.
Excluding Stopanska Banka and Almako Bank.
The NBM Supervision Department began monitoring off-balance-sheet activity in May 1999.
This ratio may overestimate the share of credit to the 16 largest debtors with classified exposure to the extent that credit arising from denar and foreign currency advances for letter of credit transactions made on behalf of banks’ clients in previous periods, as well as receivables from payments made on behalf of banks’ clients arising from guarantees (an off balance-sheet item fee that has come on balance) may have been improperly classified as “other assets” in banks’ balance sheets. The ratio, adjusted for potential misclassification, would still be very high (53 percent).
Low remuneration of reserve requirements is also partly responsible for the high spread between lending and deposit rates. In June 1998, the National Bank increased the remuneration or reserve requirements by 2.8 percentage points to 6.2 percent, a level that remains below market rates. The higher remuneration, however, has a marginal impact on the intermediation spread, estimated to be only 0.2 percentage point.
Credit measured by the NBM may not reflect all credit expansion that is due to off-balance-sheet activity, owing to possible misclassification of credit by banks as other assets and temporary accounts.
The share purchase contract was expected to be closed on October 1998 but the deal did not go through.
According to the Banks and Savings Houses Act and the NBM’s regulations. Some terminology may differ from standard usage elsewhere.