Impact assessment of IFRS 9 on banks across the EU and good practise examples for IFRS 9 disclosures

Reports from the authorities on IFRS 9

Two reports from European authorities offer interesting observations on banks’ progress toward implementing IFRS 9 and helpful insights about what banks should be including in their 2016 and 2017 financial statement disclosures.

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Impact assessment of IFRS 9 on banks across the EU and good practise examples for IFRS 9 disclosures

The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have recently issued two separate reports on IFRS 9. The EBA report offers interesting observations on banks’ progress toward implementing IFRS 9, while the ESMA report includes helpful insights about what banks should be including in their 2016 and 2017 financial statement disclosures.

Results from the EBA’s impact assessment indicate that banks are making progress but data, modelling and resourcing challenges persist

The EBA’s first report on results of its impact assessment of IFRS 9 (PDF 413 KB) was published on 10 November 2016. The EBA surveyed 58 banks across the EU to help it understand the estimated impact of IFRS 9 on regulatory funds and to support it in assessing the interaction between IFRS 9 and other prudential requirements. At the time the survey was conducted in April 2016 banks were at an early stage of preparation for the implementation of IFRS 9 and the information provided reflects this. Some of the high level findings include:

  • Overall, 75% of the banks anticipated that IFRS 9 will increase volatility in profit or loss. 60% of the banks anticipated that IFRS 9 will have an impact on lending practices of banks, such as pricing, maturity and underwriting practices.
  • Most banks were in a design phase for both classification and measurement and impairment and only a few banks were in the building phase with their IFRS 9 implementation processes. Programmes and implementation plans have continued to progress, however, some banks are re-calibrating and reprioritising more critical aspects within those plans.
  • The involvement of some key stakeholders – including boards of directors and audit committees - in IFRS 9 implementation seemed limited. Together with governance challenges, we have seen that banks are facing resourcing challenges – e.g. a lack of skilled modellers and limited IT and human resources. Consequently, the market is seeing an increase in contractor rates.
  • Data quality and availability were identified as the most significant challenges in the implementation of IFRS 9, along with model validation and the reconciliation of credit risk management and financial reporting data. Also, banks still face challenges around how to incorporate forward-looking information into expected credit loss calculations.
  • In our view the impact of IFRS 9 implementation for internal models (credit risk, market risk and counterparty risks) needs to be closely integrated for capital planning processes and quality of models has also been in interest of supervisors. We have seen in practice that banks are now starting to draft model validation standards and independent model validations are starting to be rolled out.
  • The total estimated impact of IFRS 9 was mainly driven by the impairment requirements, especially lifetime ECL for Stage 2 exposures. The estimated increase in provisions was 18% on average (and up to 30% for 86% of respondents) compared to IAS 39. Banks have had challenges to meet their profitability targets due to current market conditions and increases in provisions due to IFRS 9 implementation will definitely put more pressure on these targets. However, as banks do not have a clear line of sight as IFRS 9 numbers at this point, assessing wider business impacts is difficult.
  • CET1 and total capital ratio were estimated to decrease on average by 59 bps and 45 bps respectively (and by up to 75 bps for 79% of respondents). We have seen that banks are facing upward pressure on capital requirements through a tougher regime for calculating risk weighted exposures on credit market and operational risk, and sovereign risk exposures (RWA inflation) and additional loss absorbing capacity (MREL).

As banks continue towards implementing IFRS 9, ESMA offers its expectations for disclosure

On the same day that the EBA published its report, ESMA released a public statement, Issues for consideration in implementing IFRS 9: Financial Instruments (PDF 260 KB) in which ESMA highlights the need for consistent and high-quality IFRS 9 implementation and the need for transparency on its impact to users of financial statements.

ESMA notes that IFRS requires disclosure of known or reasonably estimable information – both qualitative and quantitative - relevant to assessing the possible impact of applying a new IFRS. ESMA expects that, for most issuers, the impacts of the application of IFRS 9 in the period of initial application will be known or can be reasonably estimated at the time of preparation of their 2017 interim financial statements. It adds that if quantitative information on the impact of the application of IFRS 9 exists based on all information available as of a reporting date prior to 2018, this should be disclosed notwithstanding that the actual figures in the 2018 financial statements might be different owing to changes in the composition of the portfolios or different economic conditions.

ESMA expects that - when the impact of IFRS 9 is expected to be significant - an issuer will:

  • Provide information about expected accounting policy choices
  • Disaggregate expected impacts
  • Explain the nature of the impacts so that users of the financial statements understand the changes and their key drivers when compared to IAS 39

It also encourages issuers to disclose:

  • Reliable information on prudential ratios and capital planning
  • Impacts on risk management and alternative performance measures

In its statement, ESMA includes an illustrative timeline and good practices for disclosure as well as specific considerations for financial institutions.

Next steps

The EBA will continue to monitor the impact of IFRS 9, including conducting a second impact assessment exercise to further assess IFRS 9 implementation. This is expected to be launched in November (based on Q3 2016 numbers) and to be completed in February 2017. Based on the findings of this exercise, the EBA may issue additional regulatory guidance that banks should take into consideration.

IFRS 9 is a priority among all European supervisors. The ECB has made IFRS 9 implementation a high priority for H1 2017 and the ECB will monitor how banks have responded to the EBA’s and ESMA’s statements. Data management together with compliance with various requirements like BCBS 239 and dealing with regulatory expectations across multiple jurisdictions mean that banks will likely have to invest more in data quality.

Even as banks grapple with numerous regulatory initiatives and a challenging competitive environment, they will have to maintain focus on achieving a high-quality implementation of IFRS 9.

Key links

Check out our recent IFRS newsletter and visit our IFRS page for more information, visit KPMG’s Global IFRS Institute.

For further global regulatory insights from KPMG’s FS Regulatory Center of Excellence, and visit our ECB Office page for articles related to the SSM.

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