On 29 March 2017 the Basel Committee on Banking Supervision published its recommendation on the interim regulatory treatment of accounting provisions and standards for transitional arrangements. These measures are a response to the international accounting standard IFRS 9 on expected credit loss provisioning which will take effect on 1 January 2018 and similar US Financial Accounting Standards Board´s guidance which will, put in a simplified way, take effect on 1 January 2020 for certain banks that are public companies and in 2021 for all other banks. Both standards are based on Expected Credit Loss (ECL) models. The accounting changes will impact the regulatory capital. Basel Committee is going to retain the current regulatory treatment of provisions under the Basel framework for an interim period. The Committee will further consider the long-term approach to the impact of provisions on regulatory capital.
It also acknowledges that it may be appropriate for some jurisdictions to introduce a transitional arrangement for the impact of ECL accounting on regulatory capital. The main reason is that the transition to ECL will generally result in an increase in the overall amount of loan loss provisions, which in many cases will reduce the capital ratios. Transitional arrangement must apply to only “new” provisions arising as a result of moving to ECL accounting. Jurisdictions must require banks to disclose publicly whether a transitional arrangement is applied. Moreover, accounting provision amount not deducted from CET1 capital should not be included in Tier 2 capital, should not reduce exposure amounts in the SA and the total exposure measure in the leverage ratio. The Basel Committee presents two approaches how a transitional arrangement might be structured.
In the European Union the IFRS 9 was adopted on 22 November 2016 to replace the previous standard IAS 39 with the commencement date of its first financial year starting on or after 1 January 2018. Nevertheless, on 23 November 2016 the European Commission, as part of its CRR II / CRD V proposals, made suggestions on transitional arrangements to lessen the impact of IFRS 9 on CET1 capital and subsequently on the impact on the capital ratios (See Article 473a of the CRR II proposal). The proposal is an option for institutions and allows to add back to CET1 the amount of provisions for exposures that are classified in stages 1 and 2 under IFRS 9 during the transitional period when each year a different scaling factor is applied. The transitional period should take 5 years.
The EBA's opinion on transitional arrangements due to the introduction of IFRS 9 was published on 6 March 2017. The EBA raises a few comments and particularly, it is concerned about the increased complexity and believes that a transitional period of four years would be sufficient. The EBA also stresses that the appropriate disclosures on the use of the option by institutions are of utmost importance.
7-4-2017