IFRS 9 incorporates a more forward-looking to account for loan losses, in a bid to address the "too little, too late" criticism that described bank provisioning ahead of the 2008 financial crisis. The standard's primary objective is to improve the quality of information about credit risk updated on a timely basis, information which should also support financial stability. It will also have an impact on the regulatory capital requirements set by prudential regulators.
The change from an incurred loss model (IAS 39) of credit provisioning to expected loss (IFRS 9), risks creating potential problems for individual banks and if misunderstood, wider financial stability issues. It is a subjective, relative and complex standard. It is also dependent on modelling, something banking regulators have been moving away from given their apparent unreliability seen before and during the financial crisis.
To head-off potential implementation issues around credit impairment under IFRS 9, ICAEW's Financial Services Faculty hosted an invitation-only roundtable bringing together key stakeholders so that they might understand the respective challenges faced by each other. It was an opportunity for the investor and analyst community to understand the challenges faced by banks in preparing IFRS 9 expected credit loss provisions, as well as discuss key assumptions, the range of possible outcomes, disclosure implications and the impact on regulatory capital.
The discussion concluded that:
- how banks provide for losses is changing to reflect lessons from the financial crisis;
- impairment losses are the single largest driver of changes in profits at banks, and changing how they are calculated matters;
- IFRS 9 will be more complicated and rely more on models;
- reliance on complicated models created a crisis of confidence in bank balance sheet capital ratios and in their risk weighted assets – the key risk metric;
- post crisis this culminated in those models now being progressively limited by Basel; and
- IFRS 9 introduces broadly those same models into the profit and loss account.
The findings
Our research and the discussion of industry experts demonstrated how complex IFRS 9 is, and the room for confusion around one of the most sector-specific standards.
It is likely that IFRS 9 will need time to bed down, taking at least two years (or a recession and/or a period of non-linear losses) for the framework to be fully road-tested and implemented in a sensible way. It is recognised that the predecessor, IAS 39, had not functioned correctly, was incorrectly implemented and poorly audited. However, IFRS 9 is still causing lots of concern for both preparers and users of accounts.
Our research was the start of that four-way dialogue between preparers, auditors, regulators and investors. It will help to drive discussion and focus energies on areas where there is still room to be manoeuvre: the shape of disclosures, the appropriate regulatory capital response and the level of standardisation or consistency that is desired or achievable across the industry. UK banks have compared notes, but there is room for more collaboration to take place across other geographies.