Guidance Note - Troubled Debt Restructuring (TDR) Supervisory Expectations

Summary

This BMA guidance note sets out supervisory expectations for how Bermuda licensed banks and deposit taking institutions should identify, classify and manage Troubled Debt Restructurings (TDRs). It does not override applicable accounting standards but is used by the Authority to assess the consistency and effectiveness of each bank's TDR practices.

What counts as a TDR

• Definition: A TDR arises when a creditor, for reasons related to a debtor's financial difficulties, grants a concession it would not otherwise consider.
• Two conditions: Classification as a TDR requires both that the debtor is experiencing financial difficulties and that the creditor has granted a concession because of those difficulties.
• Examples of concessions: Includes reduced interest rates, extended maturities, reduced principal or accrued interest, transfer of assets/equity to satisfy debt, capitalisation of arrears, principal holidays, consolidated or deferred payments.
• Exclusions: Lease or employment agreement changes, general market-driven rate decreases, and maintaining a relationship with a debtor who can obtain funds elsewhere at market rates are not TDRs.

Supervisory expectations for institutions

• Financial difficulty indicators: Institutions should assess indicators such as payment default, probability of future default, bankruptcy proceedings, cash-flow forecasts, inability to obtain market-rate funding elsewhere, or involuntary delisting.
• Reclassification to performing status: A non-performing TDR loan may only be reclassified as performing after a well-documented credit analysis and a sustained repayment period of no less than six months in cash or cash equivalents.
• Approval governance: Reclassification approvals and TDR approval/denial decisions must be made by the relevant management-level credit risk committee or credit risk function, not by front-line credit teams.
• Asset classification: Any portion of an impaired loan's recorded investment exceeding the fair value of collateral (less selling costs) must be treated as uncollectible and appropriately credit risk graded; remaining unrecovered balances should generally be adversely rated.
• Policy review: TDR approval matrices must be embedded in the institution's TDR policy, which should be reviewed at least annually.
• Reporting: TDR reporting must be made to relevant management committees and to the Board at least quarterly, covering volume, outstanding balances, concession types, impairment charges and loan types (retail or commercial), and must be documented and available for review.

The guidance applies from its publication date and is used by BMA's supervisory team to assess each bank's TDR management going forward.

Key obligations

• Institutions must classify restructured loans as TDRs when both financial difficulty and a creditor concession are present, applying the criteria set out in the guidance.
• A non-performing TDR loan may only be reclassified as performing after a well-documented credit analysis showing a sustained repayment performance of no less than six months in cash or cash equivalents.
• Approval of TDR restructuring terms and reclassification from non-performing to performing status must be made by a management-level credit risk committee or credit risk function, and must not be granted by front-line credit teams.
• Institutions must ensure TDR approval matrices are included in their TDR policy and that this policy is reviewed at least annually.
• Institutions must report TDRs to relevant management committees and to the Board at least on a quarterly basis, covering volume, outstanding balances, concession types, impairment charges and loan type.
• Institutions must maintain clear documentation of TDR reporting available for internal and regulatory review.
• Impaired loans dependent solely on collateral sale for repayment must have any excess over the collateral's fair value (less selling costs) classified as uncollectible and appropriately credit risk graded.

Applies to

banks, deposit taking institutions

Deadlines

• no less than six months: Minimum sustained repayment performance period required before reclassifying a non-performing TDR loan as performing.
• at least an annual basis: Required frequency for reviewing the institution's TDR policy, including approval matrices.
• at least a quarterly basis: Required frequency for reporting TDRs to management committees and the Board.
• 15th October, 2015: Publication date of the guidance on the Authority's website, from which the Authority's supervisory team began using it to assess banks' TDR management.