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Regulatory treatment of accounting provisions

Regulatory treatment of accounting provisions

The Basel Committee consulted in October 2016 on three proposals.

Michelle Adcock

Banking prudential, EMA FS Risk & Regulatory Insight Centre

KPMG in the UK


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The Basel Committee consulted in October 2016 on proposals to:

  1. retain, for an interim period, the current regulatory treatment of provisions;
  2. introduce transitional arrangements for the potentially material impact of expected credit loss (ECL) accounting on regulatory capital; and
  3. design a new longer-term regulatory treatment of ECL accounting provisions within the capital framework.

The Basel Committee has now finalised its approach to the first two of these issues (PDF 191 KB). The Committee will return later to the longer-term regulatory treatment of ECL accounting provisions.

Interim regulatory treatment

The Basel Committee will retain, for an interim period, the current regulatory treatment of provisions.  Since ECL accounting does not distinguish between specific and general provisions, regulatory authorities should provide guidance on how they intend to categorise ECL provisions as specific or general in their jurisdiction to ensure consistency among banks within their jurisdiction.  This categorisation can then be used when calculating regulatory capital requirements (the Basel capital framework limits the amount of general provisions that can be included in Tier 2 regulatory capital).

Transitional arrangements

The Basel Committee gives jurisdictions the option to introduce a transitional arrangement for the impact of ECL accounting on regulatory capital.

If a jurisdiction does choose to implement a transitional arrangement, then the new Basel standards require that:

  • The transitional arrangement must apply only to “additional” provisions arising as a result of moving to ECL accounting, not to provisions that would exist under accounting approaches used prior to the implementation of ECL accounting.
  • The reference metric should be CET1 capital expressed as a “money amount”. This can be adjusted so that the impact of the increase in provisions is phased in over a transition period. The adjusted CET1 capital figure would be used in calculating other measures of regulatory capital.
  • Account should be taken of tax effects in calculating the impact of ECL accounting on CET1 capital. Any deferred tax asset arising from a temporary difference associated with a non-deducted provision amount should be disregarded for regulatory purposes during the transitional period.
  • Jurisdictions can choose between a “static” approach in which the transitional adjustment is calculated just once, at the point of transition; and a “dynamic” approach which takes account of the evolution of “additional” ECL provisions during the transition period.
  • The adjustment should be reduced during the transition period on the basis of a straight line amortisation.
  • The transition period should be no more than five years.
  • Jurisdictions must publish details of any transitional arrangement applied.


The Basel standards offer jurisdictions considerable discretion in choosing whether (or not) to offer banks a transitional arrangement, and if so the calibration of this arrangement.

In the EU, the proposed revised Capital Requirements Regulation (CRR2) introduces a “dynamic” approach to phasing-in the impact of IFRS 9 on banks’ regulatory capital, allowing a proportion of the excess of the impairment loss allowances recognised under IFRS 9 over the expected losses calculated under Basel standards to be added to CET 1 capital. The proportion would decline from 100% in 2018 to 20% in 2022, and to zero thereafter.

This is broadly consistent with the final Basel standards, although the proposed CRR2 text would allow all the incremental expected credit loss allowances calculated under IFRS 9 to be added back into CET1 capital, with no adjustment to reverse out IAS 39 impairment losses that have already been recognised for impaired assets, or to reflect the tax treatment of IFRS 9 impairment losses.

The European Banking Authority published an Opinion on these proposals in March 2017, noting that it would be simpler to adopt a “static” approach and that adjustments needed to be made to the calculation of the “additional” provisions.

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