The European Banking Authority (EBA) has published a Report including some qualitative and quantitative observations of its second impact assessment of IFRS 9. This exercise, which follows up on the first impact assessment published in November 2016, has confirmed the EBA’s initial observations on the stage of preparation for the implementation of IFRS 9 and the estimated impact of IFRS 9 on regulatory own funds.
Qualitative and quantitative observations
On the qualitative side, the Report highlights that banks have made further progress on the implementation of IFRS 9 since the previous exercise, but smaller banks are still lagging behind in their preparation compared with larger banks. Also, the Report confirms that banks have reduced their plans for parallel runs of IFRS 9 and IAS 39. Banks will use various data, processes and models to estimate expected credit losses. This may affect comparability among banks and, therefore, disclosures will be key.
On the quantitative side, the responses received show that the estimated impact of IFRS 9 is mainly driven by IFRS 9 impairment requirements. The estimated increase of provisions is on average 13% compared to the current levels of provisions under IAS 39. The Common Equity Tier 1 (CET1) ratios are expected to decrease on average by up to 45 basis points (bps). Smaller banks, which mainly use the Standardised Approach (SA) for measuring credit risk, estimated a larger impact on own funds ratios than larger banks of the sample.
The EBA will continue the dialogue with banks and auditors on the implementation issues observed in this exercise and encourages banks to continue their efforts towards the high-quality implementation of IFRS 9. The EBA acknowledges that banks will continue improving elements of the implementation of IFRS 9 after its initial application.
In the medium and long term, the EBA is interested in achieving a better understanding on how the differences in the implementation of IFRS 9 may affect the measurement of expected credit losses. In addition, the EBA will continue to be involved in discussions at the EU and international levels (i.e. with the Basel Committee on Banking Supervision) to explore further if any changes to the current regulatory framework may be necessary to ensure a proper interaction of the capital framework with the expected credit loss model in accounting.
In parallel, the EBA also launched today a public consultation on its guidelines on uniform disclosure of IFRS 9 transitional arrangements to ensure institutions’ Pillar 3 disclosures on capital and leverage ratios are consistent across the EU during the transitional period.