On October 21 1998, the ministry of finance adopted a new regulation on the valuation of receivables, investments and contingency liabilities as well as of the contractual guarantees of credit institutions. Until then, these issues had been regulated through instructions by the banking supervisory authority which ceased to exist in 1997 and was replaced by the Money and Capital Market Supervisory Authority. These instructions have now been overruled by the new regulation entering into force on November 5 1998.
Under the new provisions, credit institutions are obliged to value their receivables, investments and contingency liabilities (contingent and/or future liabilities) on a quarterly basis, to estimate the risks on this basis and to form reserves in an appropriate amount. The regulation provides for five sub-categories for valuation:
- to be monitored;
- below average;
- doubtful; and
The categories are then explained in greater detail, which does not release the credit institutions from the obligation to develop internal guidelines within the framework of these minimum requirements. In addition, the credit institutions are obliged to draw up further guidelines for the assessment of its debtors, the valuation of contractual guarantees, the forming of risk reserves, the handling of investments as well as for risk management.
The ministry of finance also passed a further regulation on the supervision of the banking business. The regulation on country risks allocates the risks relating to (or deriving from) specific countries to a certain risk group and obliges the credit institutions doing business in these countries to draw up internal guidelines which provide for the forming of risk reserves in a corresponding amount.
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