Financial glossary
Most readers of the Arktika Capital website are familiar with financial markets, but not everyone works directly in banking or credit.
This glossary provides a brief introduction to some of the key terms used across our website and in the non-performing loan market. The explanations are intentionally simplified and are intended as a general guide rather than formal accounting, legal or regulatory definitions.
Non-performing loan (NPL)
A loan where the borrower is no longer meeting the agreed payment terms or is considered unlikely to repay the loan in full. Banks and other lenders may sell NPLs to specialist investors such as Arktika.
Non-performing exposure (NPE)
Through our work, we help European credit institutions to reduce capital requirements and optimize resources – contributing to a more efficient and well-functioning financial system, improving balance sheet quality and enabling healthier lending markets.
IFRS 9 – Stage 1, Stage 2 and Stage 3
Loan staging according to IFRS 9:
Lenders must set aside money for losses they expect, not only for loans that have already gone wrong. The accounting rules sort loans into three stages according to how much the risk of not being repaid has changed since the loan was taken on — the further down a loan moves, the more the lender sets
aside.Stage 1: Credit risk has not risen significantly since the loan was taken on. The lender sets aside losses from defaults expected within the next twelve months and books interest on the full balance. Provisions still vary widely between Stage 1 loans, because collateral cuts the loss actually suffered.
Stage 2: Credit risk has increased significantly, but the loan is not yet credit-impaired — the borrower may still be paying. The provision now covers the loan’s whole remaining life, often a sharp increase though nothing has been lost. More than 30 days overdue is a presumption the lender must rebut with solid evidence, but it is a backstop, not the only route in: a rating downgrade, falling collateral values or a restructuring request can all trigger the move while payments still arrive on time. Loans return to Stage 1 if the risk recedes.
Stage 3: The loan is credit-impaired: something has happened that damages what the lender realistically expects to be paid — serious financial difficulty, a breach of terms, a concession granted because the borrower could not cope, likely bankruptcy. The provision stays lifetime, and interest is booked on the balance net of the provision. Ninety days overdue is a rebuttable backstop under the accounting rules but a firm trigger under European banking regulation, and evidence of impairment should move a loan well before day ninety. Getting out takes sustained performance over a probation period — at least a year for restructured exposures.
Further reading: EBA – IFRS 9 implementation and credit-risk classification
Unsecured consumer credit
Credit provided to an individual without security over a specific asset such as a home or vehicle. Personal loans and credit-card balances are common examples.
NPL portfolio
A group of non-performing loans acquired, sold or managed together. A portfolio may contain hundreds or thousands of individual customer accounts.
Capital Requirements Regulation (CRR)
The Capital Requirements Regulation is a core part of the EU prudential framework for banks and other credit institutions. It sets rules covering areas such as regulatory capital, credit risk, liquidity and the treatment of non-performing exposures.
These rules influence how much capital a bank must hold against different types of assets and therefore affect the economics of retaining or selling non-performing loans.
Further reading: Capital Requirements Regulation on EUR-Lex
Regulatory capital
Capital that a regulated financial institution must maintain to absorb losses and meet regulatory requirements. The amount required depends partly on the risks held on its balance sheet.
Risk-weighted assets (RWA)
A measure used to reflect the risk associated with a bank’s assets and exposures. Higher-risk exposures generally result in higher risk-weighted assets and therefore require more regulatory capital.
CET1
Common Equity Tier 1 is the highest-quality form of regulatory capital held by a bank. It principally consists of shareholders’ equity and retained earnings, subject to regulatory adjustments.
Prudential backstop
The prudential backstop establishes minimum loss-coverage requirements for certain non-performing exposures. The required coverage increases as an exposure remains non-performing.
Where provisions and other recognised adjustments do not provide sufficient coverage, the shortfall is deducted from CET1 capital. This means that retaining NPLs can become increasingly capital-intensive over time and is one factor affecting a bank’s decision whether to sell a portfolio.
Further reading: EU rules on minimum loss coverage for non-performing exposures – EUR-Lex
Specialised Debt Restructurer (SDR)
A Specialised Debt Restructurer is a regulatory classification under the EU Capital Requirements Regulation for credit institutions whose main activity is purchasing, managing and restructuring non-performing exposures.
To qualify, an institution must meet specific criteria relating to its business, balance sheet and funding structure. Qualifying SDRs receive specific prudential treatment for purchased non-performing exposures, including an exemption from the relevant prudential-backstop deduction. The framework is intended to support an effective and competitive secondary market for NPLs.
Further reading: EBA – Specialised Debt Restructurer classification under the CRR
Forward flow agreement
An arrangement under which a seller regularly transfers loans or receivables meeting agreed criteria to a buyer. Unlike a one-off portfolio sale, a forward flow creates a recurring channel for future transactions.
Portfolio valuation
The process of estimating what a portfolio of loans is worth. For NPL portfolios, valuation is based largely on expected future recoveries, their timing, associated costs and risk rather than simply the original amount owed.
Servicing
The ongoing management of loans and customer accounts after origination or acquisition. For NPLs, this can include customer communication, payment arrangements, collections and other measures intended to resolve the outstanding debt.
Balance-sheet relief
A general term for reducing assets or risks that consume capital on a bank’s balance sheet. Selling an NPL portfolio can reduce credit risk and risk-weighted assets and may release capital for other uses.