Central banks and bank supervisors conduct regular Asset Quality Reviews (AQRs) to verify that commercial banks are valuing their loan portfolios accurately and accounting for bad debts correctly.
The Non-Performing Loan (NPL) Lifecycle
Supervisors pay close attention to the accumulation of Non-Performing Loans—loans where the borrower is in default or near default (typically behind on payments for 90 days or more).
[Loan Enters Default (90+ Days)] ---> Mandatory NPL Classification
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[Action A: Income Recognition Halts]                                            [Action B: Specific Provisioning]
- Stops accruing interest income on balance sheets                               - Deducts cash reserves from corporate earnings
- Write-downs value based on collateral appraisals
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