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114     Notes to the Financial Statements                                                                                                                                                                                            115


               Under IFRS 9 customers may move from a stage      When the terms of a financial asset are modified, and                Forbearance analysis
               1 provision exposure to a stage 2 exposure as a   the modification does not result in derecognition, the               The table below shows the value of forbearance arrangements agreed by the Bank.
               result of a significant increase in credit risk. To   determination of whether the asset’s credit risk has                                                                                                                 Contents
               determine whether the credit risk on a particular   increased significantly reflects comparisons of:                   31 December 2021                      No. of loans           No. of customers   Value of loans (in
                                                                                                                                                                                                                                          Contents
               financial instrument has increased significantly since                                                                                                                                 (in concession  concession period)
               initial recognition the Bank reviews each account     – the remaining lifetime PD at the reporting date based                                        In concession      Completed            period)
               annually, or more regularly, should the customer’s   on the modified terms; with                                                                                       concession*                             £’000
               payment record show any deterioration.
                                                                     – the remaining lifetime PD estimated based on data on           Asset Finance                           –                15               –                –
                                                                    initial recognition and the original contractual terms.
               As a backstop, and as required by IFRS 9, the                                                                          Real Estate                              9               10                6           12,151       Strategic Report
               Bank will presumptively consider that a significant   Should modification result in a derecognition event, the
               increase in credit risk occurs no later than when an   Bank would make an assessment as to whether the new             Total                                    9               25                6           12,151
               asset is more than 30 days past due.              financial asset is credit impaired at initial recognition.
                                                                                                                                   *   Excludes 2 customers who completed their forbearance concession and within 2 years subsequently been classified as a stage 3 loan.
               For an account to be ‘cured’ i.e. evidence a      Forbearance can be temporary or permanent depending                  Forward-looking information
               significant reduction in credit risk, and return from   on the circumstances, progress on rehabilitation, and the
               stage 2 to stage 1, the customer would need to    detail of the concession agreed.                                     Determining expected credit losses under IFRS 9 requires the incorporation of forward-looking macroeconomic
               demonstrate a good track record of payments.                                                                           information that is reasonable and supportable. To capture the effect of changes to the economic environment,
                                                                 Additional forbearance support for customers impacted                the calculation of expected credit losses incorporates forward-looking information, and assumptions linked to
               Movement from stage 3 to stage 2 will only occur   by COVID-19                                                         economic variables that impact losses in each portfolio.
               when the borrower satisfies all the criteria in the   The economic conditions resulting from COVID-19 have                                                                                                                 Corporate Governance Statement
               table above.                                                                                                           The introduction of macroeconomic information introduces additional volatility to provisions. To calculate forward
                                                                 been unprecedented in terms of the financial support
                                                                 required by customers who found themselves in financial              looking provisions, the Bank sources data from industry leading companies such as Experian and Moody’s as well
               All staging classifications are subject to        difficulty. The Bank has worked with its customers to                as using its own internal knowledge and industry publications such as the Bank of England Annual Cyclical Scenario
               management review and can be overridden subject   support them through this period with partial and full               (ACS). Management exercises judgement in estimating the future economic conditions which are incorporated into
               to appropriate approval at the Bank’s Provision or   payment holidays provided where appropriate. Customers            provisions through the modelling of multiple scenarios.
               Credit Committees.
                                                                 have typically been given payment holidays for an initial
                                                                 3-month period, which have then been reassessed where                For the Bank’s provision calculation four different projected economic scenarios are considered to cover a range of
               Forbearance                                                                                                            possible outcomes, reflecting upside and downside scenarios relative to the baseline forecast economic conditions.
                                                                 further payment breaks have been requested.
               The Bank can implement forbearance agreements                                                                          The economic scenarios are generated to capture a range of possible economic outcomes to facilitate the calculation
               for the servicing and management of customers      During the payment holiday period, customers interest               of unbiased and expected credit losses. The economic variables modelled have been identified as those that have the
               who are in financial difficulty and require some form   has continued to accrue, with the revised outstanding          most significant impact on the Bank’s financial statements, and their impact on provisions can be directly assessed.
               of concession to be granted, even if this concession   balance in the case of Asset Finance agreements being
               entails a loss for the Bank. A concession may be   repaid over an extended repayment term, reflecting the              The Bank’s economic scenarios, and the probability weightings assigned to each scenario, are produced by Finance   Independent Auditor’s Report
               either a modification of the previous terms and   length of the payment holiday, or in the case of Real                and reviewed and challenged by the Bank’s ALCO and Provisions Committees and approved by Audit committee.
               conditions of an agreement, which the borrower is   Estate Loans where the loan term is up to 25 years,                The current Ukraine crisis and increased economic uncertainty has not changed the Bank’s assumptions or
               considered unable to comply with due to financial   typically spread over the remaining term leading to                scenarios. The Bank’s scenarios, their weightings, and individual forecasts are set out in the tables below:
               difficulties, or a total or partial refinancing of an   slightly higher monthly instalments.
               agreement that would not have been granted had                                                                         Scenario description:
               the borrower not been in financial difficulties.  As at the end of 2021, the Bank did not have any
                                                                 customers in forbearance solely as a result of Covid19.
               The Bank may modify the contractual terms of      Details of the Bank’s forborne accounts are set out below.           Scenario    Real Estate Description                  Asset Finance Description
               a loan for several reasons, including to reflect                                                                       1. Base Case The Bank’s base case scenario forecasts   The Bank uses Moody’s Impairment Studio S0
               changing market conditions, or where forbearance   Forbearance – curing                                                            moderate growth in property prices over the   scenario as its base case. The forecast predicts a
               (i.e. a renegotiation of the terms of a loan) is granted   Loans are classified as forborne at the time a customer in              next 5 years.                            pickup in GDP growth, with unemployment and    Financial Statements
               at the request of a borrower. This modification may   financial difficulty is granted a concession.                                                                         the equity market remaining relatively stable.
               have an impact on the IFRS 9 impairment provision
               stage to which the asset is allocated.                                                                                 2. Downside The Bank’s downside case is a simple average   This scenario is modelled to assume the
                                                                 The customer will remain treated and recorded as                                 of its severe downside and base case scenarios  pandemic persists, which hinders recovery,
                                                                 forborne until the following exit conditions are met:                                                                     leading to higher unemployment rates, and a
               An existing loan whose terms have been modified
               may require derecognition, and the renegotiated       – When all due payments, as per the amended                                                                           delay in reaching pre-pandemic GDP levels.
               loan recognised as a new loan at fair value, with any   contractual terms, have been made in a timely                  3.  Severe   A key input to the Bank’s severe downside   This scenario uses the downside case but
               adjustments taken through the income statement.      manner over a continuous repayment period (loan is                  Downside scenario is the Bank of England’s annual cyclical  predicts a much worse outcome. The U.K. is
               Derecognition is assessed using the same ’10         considered as performing);                                                    scenario published in January 2021. This is   projected to experience further lockdowns
               percent’ test applied to financial liabilities. Where a                                                                            considered to be a severe yet plausible scenario.  as a result of a new variant of COVID. In this
               modification does not result in derecognition, the     – A minimum two-year probation period has passed                                                                     scenario, the pandemic leads to the economy
               gross carrying amount of the asset is recalculated   from the date the forborne exposure was considered                                                                     experiencing a deep and protracted recession.  Notes to the Financial Statements
               as the present value of the modified cash flows,     as performing;
               discounted at the financial assets original effective     – None of the customer’s exposures are more than 30          4. Upside   The Bank’s upside scenario generally assumes no  In this scenario the U.K. economy experiences
               interest rate. Any subsequent modification gain or   days past due at the end of the probation period.                             change to the current position in the short term.   growth following recovery from the pandemic,
               loss is then recognised in the profit or loss amount.                                                                              Over the medium-term however, upside forecasts  GDP is assumed to exceed the levels outlined
                                                                                                                                                  are assumed to be either no change or a change   in the base scenario as a result of increased
                                                                                                                                                  at least in line with the Bank’s base case.  business and public investment spending.
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