In recognition of the fact that bank balance sheets have become more complicated in recent years, The Banker has added to the range of indicators it uses to measure asset quality in this year's Top 1000 survey. Our 2009 questionnaire asked banks to report not just the percentage of non-performing loans (NPLs) to total loans, but also the total value of impaired assets on their balance sheets under the guidelines outlined in international accounting standard IAS39.

Compared to NPLs - the traditional measure of asset quality - the total impairment measure takes into account a far broader range of assets. These include credit lines, letters of commitment, standby facilities, financial investments, equities, bonds, guarantees, acceptances and contingent liabilities and all other credit commitments. Impaired assets also include securitised and other assets held on banks' trading books.

Under international accounting guidelines outlined in IAS39, banks are required to mark as impaired all assets for which the underlying market has disappeared or collapsed, as the markets for several types of structured assets did in the closing months of 2008. This includes derivatives, which under IAS39 are supposed to be recognised on banks' balance sheets and measured at fair value.

Since impairment takes into account a wider range of assets, impairment figures tend to be higher than ratios of NPLs to total loans. For example, 17.6% of banks that reported on impaired assets held impaired assets of more than 5% of total assets, compared with just 13.4% of banks that reported on NPLs to total loans.

NPLs and impaired assets are both forecast to rise in the next year. The International Monetary Fund estimates write-downs on US-originated assets alone will reach $2700bn from the outbreak of the crisis until 2010. Based on the fact that the 143 banks in the Top 1000 that gave figures on impairment held a total of $268bn of impaired assets at the end of 2008, or about 1.85% of their total assets, the estimated total impaired assets of the Top 1000 banks at the end of last year would have been in the region of $1800bn.

Measuring impairment remains more complicated than measuring NPLs since it crosses several asset classes, some of which can be difficult to value. For this reason, and also because in many countries banking remains dominated by more straightforward lending and deposit taking, the ratio of NPLs to total loans remains the most commonly quoted indicator of asset quality. More than twice as many banks in this year's ranking reported on NPLs than gave figures for total impaired assets.

However, a growing number of banks in both developed and developing markets are starting to use measures of total asset impairment as a benchmark guide on asset quality to take account of increasing complexity in their balance sheets.

Impaired assets (% of total assets) - % of banks based on data from 142 banks

Impaired assets (% of total assets) - % of banks based on data from 142 banks

Non-performing loans (% of total loans) - % of banks based on data from 373 banks

Non-performing loans (% of total loans) - % of banks based on data from 373 banks

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