EBF POSITION ON IFRS 9 TRANSITION PERIOD (Proposed Article 473a of CRR2)

Transcription

1 16 March 2017 EBF_ EBF POSITION ON IFRS 9 TRANSITION PERIOD (Prpsed Article 473a f CRR2) Backgrund As f 1 January 2018, Eurpean banks will have t substantially change the way they prvisin fr credit lsses. This fllws frm the implementatin f a new accunting standard (IFRS 9) at EU level. Under IFRS 9, banks will be required t use frecasts f future ecnmic cnditins in calculating prvisins and t estimate lifetime (stage2) prvisins n significant prtin f their lan bks. The interactin between the existing prudential framewrk and the frecasting elements f the new IFRS9 accunting standard creates a pr-cyclical mechanism that culd present a serius systemic risk t the real ecnmy. The predictin f a recessin culd becme self-fulfilling, and the depth and length f that recessin culd increase, because banks are frced t increase prvisins, and as a result may reduce lending, n the anticipatin f a dwnturn, nt when and if it actually ccurs. Banks are expected t start with the cnsensus ecnmic utlk and versight frm bank auditrs will allw little deviatin frm that cnsensus. Given the nature f ecnmic frecasting this culd create significant vlatility in bank lending t the real ecnmy. Eurpean Banking Federatin aisbl Brussels / Avenue des Arts 56, 1000 Brussels, Belgium / / inf@ebf.eu Frankfurt / Weißfrauenstraße 12-16, Frankfurt, Germany EU Transparency Register / ID number:

2 In additin, an increase in the level f prvisins will have an adverse impact n banks capital ratis, withut a crrespnding change in the level f risk, risk appetite, banks strategy, management r level f lsses. The Basel Cmmittee is undertaking a review f the interactin between the accunting and prudential regimes. It is hwever a cmplex tpic with changes in bth capital requirements as well as in accunting standards having ccurred since the riginal Basel II implementatin. The Cmmittee has yet t reach its cnclusins. The banking industry hpes that the review will address any ptential verlaps t avid capital being required fr ptential lsses already cvered by accunting prvisins. In its Reslutin f 30 September 2016, the Eurpean Parliament recgnised the impact f IFRS 9 n bank s capital and called fr a prgressive phase-in regime that wuld mitigate the impact f the new impairment mdel fr a three-year perid, r until an adequate internatinal slutin was put in place; and avid any sudden unwarranted impact n banks capital ratis and lending t the real ecnmy. Pending the Basel discussins, the Eurpean Cmmissin has prpsed a 5-year perid t enable banks t mitigate the impact f IFRS 9 n regulatry capital based n a dynamic apprach (CRR2 Article 473a). What s the prblem? i) It is highly unlikely that the full CRR2 can be adpted and be in frce as frm 1 January T prvide the intended relief, any transitin regime must be implemented frm 2018 i.e. the effective date fr the implementatin f IFRS. ii) iii) The Eurpean Cmmissin s prpsal includes in the scpe f the transitinal arrangements, prvisins that wuld have been recgnised as IBNR (Incurred but nt reprted) under IAS 39 and, althugh likely unintended, the prpsed transitinal arrangements culd als be interpreted as including prvisins fr already impaired assets (stage 3). The Cmmissin s prpsal als prvides fr pssible vercmpensatin as prvisins that wuld be added back under the Article 473a culd als benefit frm the treatment in the current prudential framewrk, being used t reduce the risk expsure amunt r increase Tier 2 capital. The prpsal shuld be mdified t ensure that nly prvisins arising frm IFRS 9 are subject t the transitinal apprach. We agree with an urgent need fr a transitinal perid. Nevertheless, we believe that the prpsed amrtizatin calendar shuld be slightly mdified. What shuld the slutin be? i) It is necessary t fast-track changes in Article 473a. There is a need fr clarity n the final transitinal apprach as sn as pssible. It is imprtant that the Eurpean Parliament and the Eurpean Cuncil accelerate the discussins t ensure that transitinal arrangements are in place sufficiently befre the 1 January 2018 when IFRS 9 enters int effect t enable entities t prepare their systems, strategic and capital plans and cmmunicatin with the relevant stakehlders (supervisrs, regulatrs, investrs, etc.). Withut such clarity, banks will have t cnsider what cmmercial actins and reductin in lending t certain sectrs f ecnmy will have t take place nw t ensure that they are in a psitin t pass stress testing in 2018 under the new IFRS 9 accunting framewrk. 2

3 ii) We believe it is imprtant t maintain a dynamic apprach as prpsed by the Eurpean Cmmissin. We believe the dynamic apprach t be cnceptually superir t a static apprach as it wuld allw fr a mre realistic quantificatin f the impact f IFRS 9 during the transitinal perid, cnsidering any changes t the size and cmpsitin f prtflis r t frecasts f frward lking infrmatin. A static apprach wuld nly be apprpriate if there was certainty f n significant evlutin in the size and cmpsitin f prtflis r t frecasts f frward lking infrmatin during the transitinal perid. T ensure that nly prvisins arising frm IFRS 9 are subject t transitinal apprach, we suggest that the difference between the lifetime expected credit lss prvisins f stage 2 financial instruments and 12 mnths expected credit lss prvisins f stage 2 financial instruments at each reprting date is added back in full t CET1 fr a minimum perid f 2 years under bth the IRB and standardised appraches, fllwed by a phasing perid. While it cannt be assumed that IBNR under IAS 39 wuld be equal t 12 mnths expected credit lsses under IFRS 9 (IBNR will likely be smaller), it is expected that, in mst cases, the main impact f IFRS 9 will stem frm the requirement t prvisin fr lifetime expected lsses in stage 2 and thus mre realistically apprximates the IFRS 9 impact withut any need t restate financial statements under IAS 39. This apprach will require calculatin f 12 mnths expected credit lsses fr all stage 2 assets, abve the requirements f IFRS 9, fr prudential purpses nly. Fr banks applying the IRB apprach, prvisins that wuld fall within the shrtfall f accunting prvisins at the given reprting date in cmparisn t regulatry expected lsses wuld be disregarded frm the transitinal apprach. Fr standardised prtflis, nly prvisins assciated t the 12 mnths expected lsses wuld be deducted frm the expsure as specific credit risk adjustments, r cnsidered as Tier 2 if they are classified as general credit risk adjustments (if this categry is kept). This will ensure a level playing field between standardised and IRB appraches and address the criticism f vercmpensatin. iii) The EBF prpses that in the perid frm 1 January 2018 t 31 December 2019 a bank shuld include in CET 1 capital an adjustment amunt f 100 % (cefficient 1). Offsetting the impact in capital is desirable, at least until a stable implementatin and better understanding f the interactin between accunting and capital measures is achieved. We believe that the neutralisatin perid is imprtant t: Prvide time t enable regulatrs t understand and cnsider the impact f the revised accunting framewrks, including the impact in stressed cnditins, and its interactin with the prudential capital framewrk Allw entities, auditrs, regulatrs and supervisrs t achieve a sensible calibratin f the triggers and threshlds t mve assets frm stage 1 t 3

4 stage 2 and understand manage any differences in implementatin between institutins Enhance a level playing field with US and ther internatinally active banks that are nt under IFRS and that will nt implement similar changes until 2020 at the earliest. iv) Finally, cncerning the applicatin f the transitinal arrangements, we believe this shuld remain at the individual discretin f each credit institutin. Sme institutins may decide nt t apply transitinal arrangements n the basis that the impact wuld nt be significant. Alternatively, the applicatin f the transitinal arrangements shuld be mandatry with each credit institutin having the ability t pt ut frm its applicatin. Enrique Velázquez Head f Public Affairs Direct: Mbile: e.velazquez@ebf.eu Denisa Mularva Avermaete Senir Plicy Adviser - Accunting & Banking Supervisin Direct: Mbile: D.Mularva@ebf.eu 4

5 Abut EBF The Eurpean Banking Federatin is the vice f the Eurpean banking sectr, uniting 32 natinal banking assciatins in Eurpe that tgether represent sme 4,500 banks - large and small, whlesale and retail, lcal and internatinal - emplying abut 2.1 millin peple. EBF members represent banks that make available lans t the Eurpean ecnmy in excess f 20 trillin and that securely handle mre than 300 millin payment transactins per day. Launched in 1960, the EBF is cmmitted t creating a single market fr financial services in the Eurpean Unin and t supprting plicies that fster ecnmic Fr mre infrmatin cntact: Denisa Mularva Senir Adviser d.mularva@ebf.eu