IFRS 9 Bank Regulations

IFRS 9 reshapes global banking regulations, focusing on loan loss provisioning to bolster financial stability. However, with many banks still provisioning at default and capital-rich banks provisioning more, discrepancies arise.

IFRS 9 Bank Regulations

EU Bank Regulations

IFRS 9 Bank Regulations: Credit Risk Provisioning

Source: European Central Bank - Eurosystem Keywords Financial Stability IFRS 9

The adoption of the International Financial Reporting Standards 9 (IFRS 9) is expected to significantly impact banks' loan loss provisioning, potentially enhancing financial stability. The IFRS 9, which focuses on expected credit loss accounting, is believed to be more responsive to shocks and more preemptive in provisioning compared to pre-existing national standards. This is a positive development, contributing to the timely management of credit risks. However, the study by Markus Behn and Cyril Couaillier indicates that most provisioning still happens at the time of default, and the dynamics around default events are not fundamentally different from those under national standards.

Interestingly, the study also reveals that banks with larger capital headroom provision significantly more, especially when using the IFRS 9. This indicates a higher risk of underprovisioning for less capitalized banks, suggesting a potential loophole in bank regulations that needs to be addressed.

Bank Regulations Under IFRS 9: Potential Developments and Effects

In the evolving landscape of global banking regulations, the introduction of the International Financial Reporting Standards 9 (IFRS 9) stands out as a pivotal development. Designed to bolster financial stability, IFRS 9 has revolutionized the domain of loan loss provisioning with its core focus on expected credit loss accounting. The intention? To render provisioning more agile to economic shocks and to foster more proactive banking practices, moving away from legacy national standards.

While IFRS 9 promises to usher in a new era of financial security, there's evidence that much remains anchored in older practices. A concerning observation is the persistent trend where most provisioning continues to occur at the moment of default, reminiscent of past national standards. This raises pressing questions about IFRS 9's real-world impact and its efficacy in truly revolutionizing banking behaviors.

Another discerning trend is the pronounced propensity among well-capitalized banks to provision more, particularly under IFRS 9's purview. This disparity suggests potential inconsistencies in banking regulations, where less capitalized institutions might resort to underprovisioning, inadvertently risking the overall financial system's stability. Over time, such practices could escalate the chances of financial crises, underscoring the need for regulatory vigilance.

For banks to fully leverage IFRS 9 and ensure compliance:

  • Regular Updates: Credit loss models should be frequently recalibrated, ensuring they remain aligned with economic realities.

  • Strengthened Internal Oversight: Robust internal controls are essential to ensure provisioning processes meet IFRS 9 standards.

  • Proactive Risk Management: With a focus on capital headroom, banks should actively manage and monitor credit risks, minimizing chances of underprovisioning.

  • Periodic Reviews: Continuous internal and external evaluations will ensure processes remain compliant and effective.

Given the current dynamics, while IFRS 9 is groundbreaking, it may require further refinements. Policymakers should be proactive, potentially introducing strategies to incentivize timely provisioning across all banks, regardless of their capital headroom. Only then can the financial realm truly claim stability in the face of evolving challenges.

As we look forward to a future under the IFRS 9 paradigm, understanding its nuances, challenges, and potential is crucial. Both banks and regulators must work in tandem, ensuring the global financial system remains resilient and poised for growth.

Read More

PwC Plus - Same same but different: credit risk provisioning under IFRS 9
Working Paper Series - No. 2841

Grand is Live

Check out our GPT4 powered GRC Platform

Sign up Free

Reduce your
compliance risks