Fast-tracking of EU legislative process on IFRS 9 and large exposures transitional provisions in CRR2

On 23 November 2016, the Commission presented its review of prudential rules which are contained in Capital Requirements Directive and Regulation (the so-called CRD5/CRR2).

Among other things, the review of the CRR includes provisions regarding:

1. transitional arrangements for mitigating the impact on the introduction of IFRS 9, an international accounting standard, on own funds (new Article 473a of the CRR) and
2. large exposure treatment of certain public sector exposures denominated in non-domestic currencies of Member States (new Articles 493(4) and (5) of the CRR).

In order to close the legislative process on these two provisions this year, the Council Presidency proposed to split them from the CRR amending regulation proposal and to deal with them in a separate draft regulation (2016/0360B(COD)). Presidency compromise of the proposal presented for Coreper may also be found here. This proposal was adopted by the European Commission on 31 May 2017.

IFRS 9 is effective for annual periods beginning on or after 1 January 2018 and the fast-tracked part of CRR amendment should enter in force in parallel also as of 1 January 2018. The objective is to prevent a sudden increase in expected credit losses according to IFRS 9 to cause a sudden decrease in institutions’ regulatory capital (i.e. common equity Tier 1 capital, CET1). Institutions shall benefit from a phased-in transitional period of a maximum duration of five years and during that period they will be allowed to include in its CET1 capital a portion of the increased expected credit losses. The portion will be decreasing over time down to zero in 2023.

The transitional arrangements for the exemption from the large exposure limit should have a duration of three years starting from 1 January 2018 for exposures of the above mentioned type incurred on or after the date of adoption of the legal act and the limit for exemption will be decreasing during the transitional period, whilst exposures of this type incurred before that date should be grandfathered and continue to benefit from the current large exposures exemption.

28-8-2017