An impairment allowance that is defined and set by a regulatory authority. By nature impairment allowances are created for impairment losses to loans and advances. Regulatory impairment allowance reflects defaulted and past due items at the reporting date (i.e. incurred losses). Furthermore, regulatory impairment allowance includes valuation adjustments on available for sale (AFS) exposures and exposures designated at fair value. This allowance does not reflect impairment held against securitization exposures.
Regulatory impairment allowance stands out against expected losses (ELs), as the latter includes both the best estimate of losses in the non-performing loan and credit portfolio and the expected losses over the next 12 months in the performing portfolio. Since that EL for the performing portfolio is based on exposure at default (EAD) and downturn loss given default (downturn LGD), EL is generally bigger than regulatory impairment allowance. The excess amount is deducted from a bank’s capital.
