IRS
The Tax implication on lenders are discussed in I.R.C.166 and in Publication 535 – Business Expense and in Publication 544 – Sales and other Dispositions of Assets
Partly worthless debts. You can deduct specific bad debts that become partly uncollectible during the tax year. Your tax deduction is limited to the amount you charge off on your books during the year. You do not have to charge off and deduct your partly worthless debts annually. You can delay the charge off until a later year. However, you cannot deduct any part of a debt after the year it becomes totally worthless.
Significantly modified debt. An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. For more information, see Regulations section 1.166-3(a)(3).
Deduction disallowed. Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charge off in that year plus the disallowed amount charged-off in the earlier year. The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year.
Totally worthless debts. If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount de ducted in an earlier tax year when the debt was only partly worthless. You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. However you may want to do so. If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year. A deduction of a partly worthless bad debt is limited to the amount actually limited to the amount actually charged off.
It should be pointed out that the IRS does not allow partial deduction unless it is charged off on the books however it does allow the deduction if the debt becomes worthless without charging-off on the books for general business operations. However, for federally regulated financial entities “only loans classified as <loss> assets for regulatory purposes qualify as deductible bad debts under a valid conformity election, while loans classified as "substandard" or "doubtful" do not” based upon FSA 199912005, Released March 26, 1999
In conclusion federally regulated financial entities can take tax deduction benefits only if the non-performing loans are charged-off.
