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December 07, 2017

The European Council adopted two legislative acts on banking: the first is a directive on the ranking of unsecured debt instruments in insolvency proceedings (bank creditor hierarchy) and the second is a regulation on transitional arrangements to phase in the regulatory capital impact of the International Financial Reporting Standard (IFRS) 9. The draft regulation related to IFRS 9 also contains a phase-out of provisions on the large exposures treatment of public-sector debt denominated in non-domestic EU currencies. The Directive and Regulation shall enter into force on the day following that of their publication in the Official Journal of the European Union. The regulation on IFRS 9 transitional arrangements shall apply from January 01, 2018.

The regulation on IFRS 9 and large exposures is intended to mitigate the potential negative regulatory capital impact of the introduction of IFRS 9 on banks. Use of IFRS 9 by banks may lead to a sudden increase in expected credit loss (ECL) provisions and a consequent sudden fall in their regulatory capital ratios. Transitional arrangements are needed from January 01, 2018, consistent with use of the new accounting standard. It was, therefore, decided to split and fast-track the entry into force of certain provisions from a broader November 2016 EC proposal amending regulation 575/2013 on bank capital requirements. The resulting draft regulation will allow banks to add back to their common equity tier 1 capital a portion of the increased ECL provisions as extra capital during a five-year transitional period. That added amount will progressively decrease to zero during the course of the transitional period. The draft regulation also provides for a three-year phase-out of an exemption from the large exposure limit for bank exposures to public-sector debt denominated in the currency of another member state.

 

Related Link: Press Release

 

Keywords: Europe, EU, Banking, Accounting, IFRS 9, Transitional Arrangements, Large Exposures, Creditor Hierarchy, European Council 

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