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This article is a summary of the views expressed by regional banking institutions in a recent survey about IFRS 9 regulation. The survey was conducted to assess progress, potential challenges, and plans of banks with regards to IFRS 9 compliance. The article describes the survey methodology and reviews current preparedness levels of banks. It shows expected impact on loan provisions, origination policies, and anticipated increases in personnel. It also reports on banks' main challenges in the areas of data, models, and infrastructure, and summarizes institutions' overall opinions of IFRS 9.

Introduction

Moody's Analytics conducted a survey in Q3 and Q4 2015 to gauge the state of IFRS 9 implementation and related challenges. The survey was conducted via one-on-one interviews with 25 regional banking institutions in North America and Europe to understand their views regarding the IFRS 9 guidelines. The group was defined as banks with under $30 billion in assets.

The purpose of this survey was to assess progress, central areas of concern, and future investment plans of regional banks with regards to IFRS 9 compliance.

The survey revealed these key points:

  • 80% of interviewed institutions were still at early stages of IFRS 9 preparedness and would be considering external help for their IFRS 9 projects.
  • In Canada, the Netherlands, and the UK, most banks anticipated investment decisions in 2016, and the largest institutions were furthest along. Spanish and Italian banks generally had not begun their IFRS 9 preparations.
  • The main challenges cited were IFRS 9 impairment and the expected impact on provisioning. Data and modeling demands were perceived as the most challenging aspects of the impairment calculations. Almost all participants expected their banks' provisions to increase.
  • Nearly 75% of all interviewed parties had defined IFRS 9 budgets. Two in five respondents planned to invest more than $1 million in Austria, Canada, the Netherlands, and the UK, with credit modeling as the primary focus.

Methodology

Moody's Analytics conducted 25 one-on-one market research discussions with regional banks between September and December 2015. All participating banks had under $30 billion in total assets, with retail being the main asset class of most banks' portfolios. Figure 1 summarizes the complete breakdown of participants by country, total assets, main asset class, and job function.

Figure 1. Demographics of banks surveyed
Demographics of banks surveyed
Source: Moody's Analytics

Low Preparedness Levels

The survey found that banks were largely unprepared for IFRS 9 at the time of the interviews, and most were still in early This article is a summary of the views expressed by regional banking institutions in a recent survey about IFRS 9 regulation. The survey was conducted to assess progress, potential challenges, and plans of banks with regards to IFRS 9 compliance. The article describes the survey methodology and reviews current preparedness levels of banks. It shows expected impact on loan provisions, origination policies, and anticipated increases in personnel. It also reports on banks' main challenges in the areas of data, models, and infrastructure, and summarizes institutions' overall opinions of IFRS 9. preparation steps. Nearly a third of respondents had not initiated any work, and almost half were still focusing on their gap analysis. That leaves a scant 20 percent that had started design or building work. Figure 2 shows the status of banks' IFRS 9 implementation progress at the time of this survey.

Figure 2. Progress of IFRS 9 implementation
Progress of IFRS 9 implementation
Source: Moody's Analytics

Both country and bank size were found to factor into preparedness levels. In Canada, the Netherlands, and the UK, most banks anticipated investment decisions in 2016, and the largest institutions were furthest along. Spanish and Italian banks generally had not begun their IFRS 9 preparations.

For most banks surveyed, IFRS 9 compliance requires more resources than they have readily available. Nearly 80 percent of respondents stated that they were or would be considering external help for their IFRS 9 compliance projects.

Banks were, however, planning to make the most of their efforts. More than a quarter of those not currently following an internal ratings-based (IRB) approach were planning on leveraging the IFRS 9 enhancements to move to an IRB approach for regulatory capital.

Anticipated Challenges

New IFRS 9 guidelines are structured in three main phases:

  1. Classification and Measurement
  2. Impairment
  3. Hedge Accounting

Banks anticipated that Phase 2, Impairment, would pose the most challenges. Nearly all respondents expected challenges in this phase, while relatively few foresaw issues in Phases 1 and 3, as shown in Figure 3.

Figure 3. IFRS 9 phases where challenges are expected
IFRS 9 phases where challenges are expected
Source: Moody's Analytics

Banks expected IFRS 9 to significantly impact loan origination policies and bank provisioning, with 80 percent expecting increases in provisions. More than a quarter expected changes to loan origination policies, with anticipated impacts on data capturing, pricing, and credit decisioning (Figure 4).

Figure 4. Impact on loan origination policies
Impact on loan origination policies
Source: Moody's Analytics

This survey found that when addressing impairment, most banks were challenged with data and modeling demands, with some infrastructure challenges, as well.

Figure 5. IFRS 9 impact on resources and business areas
IFRS 9 impact on resources and business areas
Source: Moody's Analytics

In terms of data challenges, the most critical challenge for many banks was the lack of historical data for some portfolios. Banks also faced a lack of PD data at origination, and some data characteristics which were needed for IFRS 9 were not previously gathered or stored.

Modeling challenges, the most critical for banks, included the following:

  • Lack of PD / LGD models for some portfolios
  • Lack of robustness in existing PD / LGD models
  • Issues converting Through-the-Cycle (TTC) to Point-in-Time (PIT) and estimating lifetime expected credit losses
  • Need for model enhancements to address forward-looking requirement

The banks interviewed also noted infrastructure challenges of low or medium criticality, including:

  • Issues related to handling larger volume of calculations
  • Data quality due to legacy system issues
  • Need for improved systems to gain automation and auditability in IFRS 9 calculations

IFRS 9 compliance requires sizable investments by banks, with a primary focus on credit modeling to overcome stated challenges. Nearly 75 percent of respondents stated they had defined an IFRS 9 budget to be used for staff cost, fees of external advisors, and tool upgrades. Banks in Austria, Canada, the Netherlands, and the UK were the most likely to spend a significant amount, with almost 40 percent reporting that they planned to invest over $1 million.

Personnel increases were a major area of planned investment among survey respondents, with 60 percent reporting they planned to increase staffing to handle IFRS 9 challenges (Figure 5). Other main areas of planned investment included equipment upgrades and third party vendor support.

Banks' Opinions and Reactions

While most participants agreed that IFRS 9 would bring a degree of uniformity to the international banking industry, they also voiced significant concerns about the guidelines' limitations and weaknesses.

"IFRS 9 brings 'positive concepts' to address some of the weaknesses of IAS 39," according to one respondent from a UK bank. "However, it raises issues from a practical point of view, particularly in terms of the modeling, since the new standard will not enhance comparability among institutions."

Some believed the guidelines would not effect change or improve transparency on a large scale.

"Conceptually, the framework makes sense, but in practice it's unlikely that many banks have been estimating provisions based on incurred losses only," according to a Canadian bank representative. "There are inconsistencies in how financial instruments are accounted for and the balance sheet still will not reflect the real situation."

But despite its shortcomings, respondents expressed a general sentiment that IFRS 9 is a step in the right direction.

According to a UK respondent:

"Even though IFRS 9 will involve a lot of effort and high costs, it will help preserve quality across the entire industry by creating a more solid governance structure across all banks."

As indicated in this survey, IFRS 9 poses substantial challenges to the banks interviewed. To prepare for this new accounting standard banks will have to adapt their operations and the way they classify and manage the quality of their loans and provisions at origination. Moreover, banks will need to transform their processes and practices in terms of expected loss estimation, data management, capital calculation, and reporting. As indicated in this survey, IFRS 9 poses substantial challenges to the banks interviewed. To prepare for this new accounting standard banks will have to adapt their operations and the way they classify and manage the quality of their loans and provisions at origination. Moreover, banks will need to transform their processes and practices in terms of expected loss estimation, data management, capital calculation, and reporting.

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