IFRS 9. Impact on the Banking Industry. Katrien Schotte Finance A&R - Policies 9 June 2015

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1 IFRS 9 Impact on the Banking Industry Katrien Schotte Finance A&R - Policies 9 June 2015

2 IFRS 9 Classification and Measurement A move from a complex, rules-based approach to a principle-based model for financial assets Same categories / measurement basis as in IAS 39 New classification triggers in common language Opportunity to align financial reporting on management view Elimination of the Held-to-Maturity category Accounting treatment of liquidity portfolio s Missed opportunities? Bifurcation of embedded derivatives limited to financial liabilities Guidance for recognition/derecognition carried over from IAS 39 Potential impacts More full fair value or rather more amortised cost? Equity and regulatory capital may be affected by inclusion of unrealised gains/losses under CRD IV Impact on KPIs because of more volatile profit or loss / equity Comparability across the banking sector may be affected Departement 10/06/2015 2

3 IFRS 9 Impairment Fundamental redesign moving from an incurred loss model to an expected loss model Addresses the too little, too late issue of IAS 39 and the cliff-effect Incurred loss model Nevertheless there are some concerns Lack of convergence between accounting and regulatory expected loss models Expected loss model Standard guidance for calculation of expected loss significant increase in credit risk Estimating expected losses requires a very significant degree of judgement Conceptual and implementation challenges Assessment of significant increase in credit risk Review and change methodology for measuring 12-month expected loss Estimate lifetime expected loss including forward looking information Extensive disclosure requirements Departement 10/06/2015 3

4 IFRS 9 Impairment The Basel Committee on Banking Supervision (BCBS) Guidance on Accounting for expected credit losses Requires highest-quality implementation of an ECL accounting framework from internationally active banks and those banks more sophisticated in the business of lending No use of practical expedients e,g. for low credit risk exposures(small/large banks and portfolios) Use of reasonably available information on the basis of undue cost or effort overruled Expectation of full integration between credit risk practices and finance reporting challenging given the conceptual differences (PiT vs TTC) No guarantee of improving usefulness of the information Potential impacts Cliff-effect on first-time adoption Volatility in profit or loss Impact on capital, hence on the cost of capital and thus most likely on the pricing of loans Impact on regulatory capital still unclear Lack of comparability within an entity and across the banking sector Lack of convergence with US GAAP Departement 10/06/2015 4

5 IFRS 9 Hedge Accounting Removal of some of the burdens in IAS 39 to bring hedge accounting more in line with the entity s risk management Relaxation of effectiveness testing requirements in particular elimination of the bright line test of % to demonstrate hedge effectiveness Rebalancing instead of discontinuation and re-designation Extension of scope of hedged items: Aggregated exposures including derivatives eligible as hedged item Expansion of fair value hedge of net positions / layers of hedged items Hedging instruments: less volatile profit or loss because of the exclusion of time value of options and forward points Hedge accounting remains an option, but voluntary de-designation will be prohibited if risk management remains unchanged Changes work out well for corporates and less for banks The absence of new guidance for macro hedges, even though mitigated by accounting policy choice to continue with IAS 39 for portfolio hedges of interest rate risk Extensive new disclosure requirements to ensure comparability Potential impact More hedge accounting as it becomes less onerous? Departement 10/06/2015 5

6 IFRS 9 Implementation Implementation is challenging Cross-disciplinary involvement (Finance, IT and Risk) Strong co-ordination needed between Finance and Risk to ensure credit data quality Interaction with BCBS #239 on risk data aggregation and risk reporting Interpretation of IFRS by regulators (ECB and BCBS) Restatement of comparatives over 2017 Not required by IFRS 9 Peer pressure Regulators Impact across the organisation Departement 10/06/2015 6

7 IFRS 9 Impact on the Banking Sector Impact on the financial statements Classification and measurement: more products at amortised cost? Disappearance of held-to-maturity Return to basic product features Impairment: Estimating impairment is an art rather than science. Hedge accounting Opportunity to translate economic hedges into hedge accounting Estimated impact? Banks have been waiting for the final standard to start the implementation Dependent on economic conditions at date of first-time adoption Interdependencies and impact on the banking business Business impacts: product catalogue and product pricing Liquidity regulation: impact on leverage ratio and NSFR Capital management First-time adoption impact on equity followed by volatility in profit or loss Capital instruments Capital planning Interaction with the changing banking business and economic environment Departement 10/06/2015 7