The ECB's publications of guidelines and recommendations over recent months are putting more and more pressure on banks. They also reveal areas where the European Central Bank (ECB) has concerns about banks' application of accounting requirements as well as highlighting the potential for increased divergence between supervisory expectations and accounting requirements. Some of the areas that are under the spotlight include, non-performing loans (NPLs), IFRS 9 and the valuation of financial instruments.

But what are the consequences? How do banks differentiate between helpful insights about the consistent application of accounting standards versus supervisory expectations or requirements that stand apart from accounting requirements? How do banks remain compliant with IFRS accounting standards whilst also managing supervisory expectations? The ECB has mentioned all of these topics in their 2019 supervisory priorities, so banks should expect heightened interest. Now is the time to get prepared and understand where these differences lie.


Banks face a complex regulatory and supervisory environment with respect to provisioning definitions. In the last year alone, one provisioning calendar has been published by the ECB, and another proposed by the European Commission, with comments from the EU parliament. These calendars are not fully aligned with each other in terms of timing, or the ratios of supervisory provisioning requirements. Furthermore, they do not align to the accounting provisioning requirements of IFRS 9.

To add further complexity, the ECB set out supervisory expectations for the provisioning of banks' NPL stocks in their SREP letter in late 2018. KPMG member firms have noted that this has been done on a case-by-case basis with provisioning requirements (%) varying between institutions. Banks will first need to assess how these differ from impairment losses determined under accounting standards. Based on information gathered from SSM banks in several member states, we have observed that some banks have been categorised into three main buckets. These buckets differentiate between banks according to their financial capacity to make additional provisions, or their volume of NPLs, and can therefore lead to different provisioning calendars.

Based on all of this information, we would encourage banks to perform impact assessments. These should review the broad implications of provisioning expectations, the key impacts and drivers on profitability and capital, and potential actions to mitigate these challenges. Banks will need to keep their accounting books clearly aligned with IFRS requirements while maintaining regulatory and supervisory books to support enhanced dialogue with their Joint Supervisory Teams.


IFRS 9 first became effective as of 1 January 2018. The ECB and the European Banking Authority (EBA) have performed multiple thematic reviews and impact assessments before, during and after the introduction of this standard. These have provided a unique opportunity to make a horizontal assessment of the various methods that different banks have used to implement IFRS 9. In our article on the regulatory Definition of Default, we discussed how these requirements are impacting IFRS 9 accounting. However, aside from this, KPMG have noted other interactions.

In general, discussions with clients lead us to believe that the ECB has a conservative view on many aspects of IFRS 9 and expects to see uniformity in the way that banks apply it. Examples include the following:

  • When it comes to the forward looking elements of IFRS 9 and management assumptions during the current benign economic environment, we are seeing that the ECB has rather conservative expectations on market developments and considers banks to be optimistic compared to the ECB's official macroeconomic forecasts. For example, in the ECB's opinion banks may be including a weakening macro-economic environment too late. They have also discussed banks' strategies for point-in-time parameter estimates and associated volatility.
  • Regarding IFRS 9 phase-ins, the ECB has examined whether there could be unintended effects on CET1 caused by erroneous input factors, due to misstating the stock of accounting provisions determined either under IAS 39 for year-end 2017, and/or the total amount and allocation of accounting provisions under IFRS 9's first application. This could have occurred if a bank postponed the recognition of provisions required under IAS 39 to the first application date of IFRS 9, leading to an undue benefit from a transitional add-back to CET1 capital.
  • Furthermore, regarding the classification of government bonds measured at amortised cost, the ECB has questioned how banks are assessing whether sales are insignificant or infrequent when assessing the bank's business models. This may impact whether the bonds are considered “held to collect”. The ECB's thematic review is ongoing and it appears banks may be using different quantitative indicators.

As with NPLs, banks should continue to be proactive in discussing IFRS 9 through thematic review with their supervisor and auditors. This will help ensure that their accounting application is well defined for the ECB so as to avoid any surprises in future.

Valuation of Financial Instruments

In their recent annual review, the ECB has restated its intention to perform more analysis on the aspects of IFRS 13 related to valuing financial instruments, including how banks level their positions, especially between level 2 and level 3. As noted in a previous article discussing illiquid securities and derivatives, one focus of on-site investigations is how banks define observability in the context of determining whether an instrument is classified as Level 2 or Level 3 and whether any Day 1 profit and loss is recognised.

Although the ECB is yet to publish any guidance or expectations on this issue, it is clear that banks should have well documented policies on how they assess observability under IFRS 13. That should include how they justify thresholds for checking leveling choices, to ensure they can clearly support the methodology behind their current accounting practices to the ECB.

In conclusion, banks should be aware that recent supervisory publications could have unexpected consequences on their reporting practices. It is clear that the accounting regime must remain the baseline for banks' financial statements, and banks can expect challenge from the ECB as to how their accounting practices are compliant with accounting standards. Additionally, where supervisory expectations or rules require calculations that differ from accounting standards, we expect banks to maintain different sets of accounting and prudential numbers. These need to be carefully managed when communicating externally with the market and the wider financial community.

Connect with us