Interaction of IFRS 9 with the regulatory framework 9 June 2015

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1 Interaction of IFRS 9 with the regulatory framework 9 June 2015 Michel Colinet Prudential Policy & Financial Stability Head Governance, Accounting & Audit

2 Agenda A. IFRS9, Financial Instruments: interaction with prudential framework and attention points for supervisors A. Basel Guidance on Expected Credit Losses (SCRVL) This presentation does not represent NBB official views 2 / xx

3 A. IFRS9, Financial Instruments 3 / xx

4 Use of IFRS in prudential supervision - Insurance Solvency I: BGAAP (solo) and IFRS (conso) accounting data form the basis of prudential reporting and solvency calculations/assessment (with prudential filters on IFRS) Solvency II (2016): All assets and liabilities (other than technical provisions) must be measured at fair value Exception: no recognition of fair value changes of liabilities due to changes in own credit risk (OCR) Which fair value? As defined under IFRS (13) in most cases Impact of IFRS 9 on Solvency II? No impact on Solvency II prudential reporting (all assets/liabilities at fair value even if at amortised cost in financial statements); Impact on financial analysis (micro/macro) when financial statements are used (e.g. of monitoring insurers performance link with IFRS4) 4 / xx

5 Use of IFRS in prudential supervision - Banks Accounting data are at the basis of the prudential supervisory framework (Basel/CRD) Own fund calculation and risk assessment are based on accounting figures subject to prudential filters/corrections Unfiltered accounting data are used for financial analysis (performance, macro developments ) As a result, applicable accounting framework (Belgian GAAP at solo level and IFRS at consolidated level) have an important influence on prudential reporting/supervision Impact of IFRS 9? Direct impact of new provisions (classification, measurement, hedging, impairment) on solvency balance sheet (and own funds) Impact of prudential filters/corrections different under IAS39 and IFRS9 5 / xx

6 Use of IFRS in prudential supervision - Banks Main prudential filters (related to financial instruments under IFRS) Deduction from own funds of fair value changes related to cash flow edges (OCI) Impact IFRS 9 Limited impact (depending on whether IFRS9 or IAS39 hedging provisions are used) Deduction of the fair value changes due to changes in own credit risk (liabilities) No impact (IFRS9 only changes location of the recognition of changes in OCR) Removal from regulatory own funds of unrealised gains/losses on AFS instruments Optional transitional period until 2018 BE: exclusion of 60% in 2015 (specific treatment for Govies) As of 2018: full alignment accounting-prudential - Recognition of general loans loss provisions in T2 for standard banks; RWA based on values net of impairment - Treatment excess/shortfall of accounting loans loss provision for IRB banks - Possible important impact for assets classified as AFS under IAS39 (with application of filter) but classified at amortised cost or fair value though P&L under IFRS9 (as no filter applies for this categoriy - Classification from AFS to AC implies removal of OCI reserve at transition to IFRS9 - Linked to implementation timing - Limited (or no) general provisions under IAS39 incurred loss model. Quid under an EL model? - IFRS9 EL impairment impact on RWA? - Amount of excess and shortfall might be significantly different under an EL model 6 / xx

7 Attention points for supervisors Implementation challenges Expected loss model is a significant improvement over the current impairment requirements in IAS 39, but is also an important implementation challenge (especially for SA banks) and more judgemental on many aspects, e.g.: Identification and use of forward looking information Tracking of credit deterioration assessment of significance Estimate of future losses Use of expedients Relevance of BCBS supervisory Guidance on Expected Credit Losses 7 / xx

8 Attention points for supervisors Implementation challenges Expected loss model: IRB banks can leverage prudential processes and data for calculating expected losses, but there are differences: PD: 12 months point in time considering forward looking information and macro-economic factors under IFRS 9 vs.12 months through the cycle for Basel EL Definition of default (Basel: 90 days or unlikely to pay) LGD/EAD : neutral estimate considering all information (discounted at EIR) vs. downturn estimate in Basel (discounted at cost of capital or RFR) 8 / xx

9 Attention points for supervisors Implementation challenges Classification & Measurement Application of the SPPI test Definition of business models & robust internal governance on proper application (e.g. monitoring significance of sales of assets at amortised cost; wash sales ) Impact on business (e.g. shifts in investments strategy, changes in loans' features ) Classification of regulatory liquidity portfolio First time application Time needed for high quality implementation, Level playing field, comparability, Impact on prudential reporting (FINREP) Specific issues for insurers: interaction with IFRS4 9 / xx

10 B. BCBS Guidance on Accounting for Expected Credit Losses 10 / xx

11 Objective of the guidance To provide banks and supervisors with guidance on the supervisory requirements for sound credit risk practices and application of EL in accounting; To encourage a high quality, robust, and consistent implementation and on-going application of an ECL accounting model (loans only not debt securities); To emphasize the need for timely and appropriate recognition of credit losses. It will not set accounting or supervisory requirements that contradict the accounting standards, but rather, will outline the Committee s view of the robust application of those standards; It will not deal with changes (if any) to the Basel capital requirements. 11 / xx 11

12 Structure of BCBS guidance Main section of the Guidance will deal with supervisory principles for credit risk practices affecting the accounting estimate of allowances for lending exposures; IFRS appendix will outline supervisory requirements specific to key issues related to the implementation of the IFRS 9 ECL model in IFRS jurisdictions. 12 / xx 12

13 Key elements of the BCBS guidance Main section: Principles for sound credit risk practices Principles 1. Responsibilities of the Board and Senior Management 2. Components of a sound ECL methodology 3. Requirements for credit risk grading systems to appropriately group exposures 4. Appropriate allowances and requirements for collective and individual assessments 5. Policies and procedures for validation of internal credit risk assessment models 6. Use of experienced credit judgement to incorporate forward-looking expectations and macro-economic factors 7. Integration of accounting, credit risk and capital management 8. Enhanced decision-useful disclosures Responsibilities of supervisors 13 / xx 13

14 Key elements of the BCBS guidance IFRS Appendix: Supervisory expectations specific to IFRS jurisdictions Appendix A1. Measurement of the allowance amount equal to 12-month ECL Broad range of information; Assess credit deterioration each reporting period, including increases in PD within 12 month ECL A2. Assessment of significant increases in credit risk Use broad range of information; Must be forward-looking and consider macro-economic factors; As soon as a significant increase in credit risk is identified; Refer to Basel definition of default A3. Use of practical expedients/simplifications 14 / xx 14

15 Questions 15 / xx 15

Subject: The EBA s views on the adoption of IFRS 9 Financial Instruments (IFRS 9)

Subject: The EBA s views on the adoption of IFRS 9 Financial Instruments (IFRS 9) THE CHAIRPERSON Roger Marshall, EFRAG Board Acting President European Financial Reporting Advisory Group EFRAG 35 Square de Meeûs B-1000 Brussels EBA/2015/D/138 26 June 2015 Subject: The EBA s views on