Circulaire BCL 1998/156 of 21 December 1998 — Breakdown of Value Adjustments Established by Credit Institutions as of 31.12.1998

Postal Address: L-2983 Luxembourg Headquarters: 2, boulevard Royal VAT: LU 1544 4328 Telephone: (+352) 4774 - 1 Fax: (+352) 4774 - 4901

Luxembourg, 21 December 1998

To all credit institutions

CIRCULAR BCL 98/156
Breakdown of value adjustments established by credit institutions as of 31.12.1998 1

Ladies and Gentlemen,

In accordance with the practice of previous years, the Central Bank of Luxembourg is conducting a census of value adjustments established by credit institutions as of 31 December 1998 to cover country risk and doubtful credits.

Please note that, for statistical reasons, the 1998 census has been supplemented by a new Table 4 covering the commitments of credit institutions in the jurisdiction towards certain specific countries.

We therefore request that you communicate your data on the forms attached to this circular, respecting the following instructions:

1. Institutions concerned: This census, which has both a prudential and a statistical character, is addressed to all credit institutions, including branches of banks having their headquarters in a country of the European Union.

1 Note that modifications compared to Circular IML 97/141 of 17 December 1997 regarding the breakdown of value adjustments established by credit institutions as of 31.12.1997 are indicated by a marginal line.

Postal Address: L-2983 Luxembourg Headquarters: 2, boulevard Royal VAT: LU 1544 4328 Telephone: (+352) 4774 - 1 Fax: (+352) 4774 - 4901

2. Date of response: 26 February 1999.

3. Date of data establishment: The data must be provided as of 31 December 1998; they must reflect the situation correctly assessed on that date, even if it does not correspond to a closing of accounts.

4. Value adjustments: Value adjustments include:

• the value adjustments listed under item 2-81.300 of the liabilities side of the balance sheet, which correspond to value adjustments established on items listed on the assets side of the balance sheet where they are to be entered in column 2 of Table B 1.1.
  and
• the provisions established on contingent liabilities and off-balance sheet commitments listed under items 2-06.310, 2-06.320 and 2-06.330 of the liabilities side of the balance sheet.

5. Tables 1 and 2: Country risk coverage
   Exposures affected by "country risk" and, where applicable, the related value adjustments are to be included in these tables.

Tables 1 and 2 must provide an image of the final risk incurred as country risk and are therefore to be prepared according to the following rules:

5.1. Country risk: This refers to the risk of temporary non-recovery of claims due solely to the political and/or economic situation of the country of establishment. The solvency and liquidity in national currency of the bank's debtors are not called into question; the repayment of their debts is nevertheless delayed or compromised given that a transfer of funds to foreign creditor banks is not possible.

Claims on sovereign debtors are to be assimilated to this country risk.

5.2. Countries: Commitments (see 5.3.) towards all countries outside the OECD are to be reported. Commitments are to be mentioned even if no apparent risk currently exists in relation to a given country, or if no value adjustment has been established.

Postal Address: L-2983 Luxembourg Headquarters: 2, boulevard Royal VAT: LU 1544 4328 Telephone: (+352) 4774 - 1 Fax: (+352) 4774 - 4901

The list is to be completed by commitments on OECD countries for which the credit institution estimates that a risk of the country risk type exists.

5.3. Commitment: The commitment includes:

• direct claims listed on the assets side of the balance sheet (accrued and unpaid interest is not to be included)
  and
• off-balance sheet commitments listed under items 3-01.000, 3-02.000 (with the exception of sub-items 3-02.200 and 3-02.510), 3-03.100 and 3-03.200 of Table B 1.1.

Contracts on exchange rates and interest rates are to be reported at the risk-equivalent amount or replacement cost as defined in Part IV - 2.3. page 4 of the Collection of Instructions to Banks.

Commitments towards branches are to be allocated to the country of the headquarters.

The commitment is to be reduced by claims to be reallocated to other countries and increased by claims reallocated from other countries.

Commitments towards borrowers from a given country, which are formally guaranteed (by a real or personal guarantee) by a resident of another country, are to be reallocated to the latter. A reallocation can only be made in cases where the guarantee (real or personal) excludes country risk. In particular, a claim on a central administration of Zone B, accompanied by a guarantee in the form of a zero-coupon issuance by a central administration of Zone A (Brady Bonds), is to be considered as guaranteed by a central administration of Zone A only up to the market value of the zero-coupon issuance. It follows that the positive difference between the nominal value (see below) of the claim on the central administration of Zone B and the market value of the zero-coupon issuance is to be included in the total commitment of the Zone B country concerned. Furthermore, this commitment is to be listed on a separate line under the country concerned preceded by the mention "Brady Bonds".

Moreover, in the event that a credit institution benefits from a formal guarantee from its parent company, this guarantee must be taken into consideration.

Postal Address: L-2983 Luxembourg Headquarters: 2, boulevard Royal VAT: LU 1544 4328 Telephone: (+352) 4774 - 1 Fax: (+352) 4774 - 4901

When the guarantee does not cover a specific commitment but is a global guarantee, it is to be distributed proportionally across all commitments.

Commitments are to be included in the tables at their nominal value. In the event that this is higher than the acquisition value, as is the case for example during exchanges of claims or purchases of claims on the secondary market, the discount is to be entered in column 4 as implicit value adjustments; it appears however distinctly in parentheses, where applicable on a second line next to additional value adjustments established (in this latter case, these are the value adjustments actually established and recorded in the accounts). It enters, together with these latter, into the determination of the single coverage rate for risk which is to be entered in column 5.

5.4. Table 1 is to be drawn up for credit relations (within the meaning of Table 2.3.) with non-bank debtors and credit institutions.

To facilitate the compilation and analysis of data, we request that you respect the presentation of Table 1.

• Table 1 is indeed divided into two parts:
  a) Commitments towards the main risk countries (49 countries); Given the current economic situation in some South-East Asian countries, the list of main risk countries has been extended to take into account risks on these countries. b) Commitments towards other non-OECD countries (to be entered in ascending order of IBLC codes);
• Subtotals for parts a) and b) as well as the total a) + b) are to be entered.

5.5. Table 2 is to be drawn up for relations on the interbank market.

Postal Address: L-2983 Luxembourg Headquarters: 2, boulevard Royal VAT: LU 1544 4328 Telephone: (+352) 4774 - 1 Fax: (+352) 4774 - 4901

6. Table 3: Value adjustments for doubtful debtors
   Exposures affected by a risk of debtor insolvency, as well as value adjustments for doubtful claims related thereto, are to be included in this table. Unrecoverable claims and amortizations practiced on these claims are also to be entered. Claims presenting only a country risk within the meaning of the definition given in point 5.1. of this circular are to be entered in Tables 1 and 2, and will no longer be included in Table 3.

Table 3 covers only claims (balance sheet and off-balance sheet) on bank and non-bank debtors, which exceed LUF 150 million or 10% of the credit institution's own funds.

Regarding the definition of the concepts used and the treatment of these claims, institutions are requested to refer to the instructions of the Bank Collection (DCP pp. 24 to 26 and Part IV - Table 2.3. information on risk concentration).

7. Table 4 covers the commitments of credit institutions towards China, Japan, Singapore and Hong Kong, which are to be reported for statistical reasons only. The commitments in question, as well as, where applicable, the related value adjustments, are to be included according to the same rules governing the preparation of Tables 1 and 2.

8. We invite your management to personally ensure that the data communicated on the attached tables are prepared in respect of the preceding instructions.

Please accept, Ladies and Gentlemen, the expression of our most distinguished sentiments.

CENTRAL BANK OF LUXEMBOURG

Arthur PHILIPPE
Director

Jean-Nicolas SCHAUS
Director

Annexes.

Postal Address: L-2983 Luxembourg Headquarters: 2, boulevard Royal VAT: LU 1544 4328 Telephone: (+352) 4774 - 1 Fax: (+352) 4774 - 4901 to be sent to:
Central Bank of Luxembourg
L-2983 LUXEMBOURG labeled in mio of LUF
Breakdown of value adjustments
(to be filled in by typewriter)
Name of the credit institution: ...............................
Situation as of 31.12.1998
Authorized signatures and stamp: Mr./Mrs./Miss

Name of the employee:

Tel.:

Postal Address: L-2983 Luxembourg Headquarters: 2, boulevard Royal VAT: LU 1544 4328 Telephone: (+352) 4774 - 1 Fax: (+352) 4774 - 4901 Mr./Mrs./Miss

Name of the employee:

Tel.:

Reserved for the Central Bank of Luxembourg:
Reference Number Entry Registration Verification Tallying Filing December 1998