It is now reassessing the methodology which underpins the calculation of the coverage ratio and will implement the outcome on 13th April.
The coverage ratio measures the provision fund’s ability to cover expected bad debts and is calculated by dividing the size of the provision fund by the expected level of future losses from active loans.
“It is a clear goal of ours to ensure that the provision fund coverage ratio is as accurate as possible so that we have a very sound basis for displaying the strength of the provision fund,” said RateSetter.
“It is important to clarify that our aim is to make the expected loss figure as objective as possible, thus eliminating subjectivity.
“We could, of course, build in economic forecasts and assumptions but we believe it makes sense to anchor the figure in empirical data to ensure it is completely clear.”
RateSetter expects to see a neutral to slight increase in the coverage ratio and said it was aware of the potential impact that changes in economic conditions could have on the performance of loans.
“This is the main reason why the coverage ratio is higher than 100%,” added RateSetter.
“Going forwards, as the amount and the maturity of our data increases, we plan to undertake more regular reviews of the application of the methodology and we will communicate this to you each time.
“This, along with the wider range of data we publish, ensures that RateSetter continues to lead the way in providing investors with accurate and transparent information.
“Transparency, alongside prudence, is a key tenet of RateSetter.”
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