IFRS 9 is here! Applicable since 1 January 2018, the new reporting standard seeks to ensure the solvency health of banks.
The European Parliament has amended Regulation No. 575/2013 to cater for the impact of IFRS 9 on the funds of banks. The most significant impact anticipated by the banking industry and their regulators is the shift in loss recognition method, from the incurred loss model to the expected loss model (ELM). Given the significance of this shift, the European Parliament has introduced transitional arrangements that allow banks to include, in their Common Equity Tier 1 capital ratio (CER), a portion of the additional provision calculated with the ELM. Additional relief is allowed for banks affected by worsening macro-economic factors.
Some key features of the transitional arrangements are outlined below:
- The transitional period is allowed for a maximum period of 5 years, i.e. from 2018 to the end of 2022.
- Banks that choose to adopt this option for their regulatory reporting will need to inform their respective regulators.
- Banks are required to eliminate the effect of this transition from their CER by the end of this transitional period.
- Banks are required to publicly disclose their own funds, capital ratios, and leverage ratios both with and without application of transitional arrangements.
- Credit risk relief allowed in the standardised approach should be reduced based on methodology as detailed in the amended regulations.
In terms of exemptions available to banks for large exposure limits, e.g. if they are exposed to the public sector debts of certain European Member States, the transitional period allowed is 3 years from 1 January 2018 for exposures incurred on or after 7 December 2017. Any exposures that banks signed prior to 7 December 2017 should continue to benefit from the large exposure limit exemption.
Please refer to this page for the full text of the regulation and detailed mechanics of the transitional arrangements. For practical guidance please also check out our IFRS 9 topic page.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.