Publication date: 16 March 2017 EBF advisor: Denisa Mularova
It is important that the European institutions clarify the transitional approach on IFRS 9 for European banks as soon as possible for application as of 1 January 2018. Without such clarity, banks will have to consider what commercial actions and reduction in lending to certain sectors of economy will have to take place now to ensure that they are in a position to pass stress testing in 2018 under the new IFRS 9 accounting framework.
It important to maintain a dynamic approach to transition given its conceptually superiority as it allows for a more realistic quantification of the impact of IFRS 9 during the transitional period. A static approach would only be appropriate if there was certainty of no significant evolution in the size and composition of portfolios or to forecasts of forward looking information during the transitional period.
A dynamic approach would not require restatement of IAS 39 during the transitional period. As it is expected that, in most cases, the main impact of IFRS 9 will stem from the requirement to provision for lifetime expected losses in stage 2, the EBF proposes that the difference between the lifetime expected credit loss provisions of stage 2 financial instruments and 12 months expected credit loss provisions of stage 2 financial instruments at each reporting date is added back in full to CET1 for a minimum period of 2 years under both the IRB and standardised approaches, followed by a phasing period. While this will require calculation of 12 months expected losses for all financial assets for regulatory purposes only, it will ensure that only provisions stemming from IFRS 9 will subject to the transitional approach.
The proposed neutralisation period is important to:
Enhance a level playing field with US and other internationally active banks that are not under IFRS and that will not implement similar changes until 2020 at the earliest.
Provide time to enable regulators to understand and consider the impact of the revised accounting frameworks, including the impact in stressed conditions, and its interaction with the prudential capital framework.
Allow entities, auditors, regulators and supervisors to achieve a sensible calibration of the triggers and thresholds to move assets from stage 1 to stage 2 and understand manage any differences in implementation between institutions.
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