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December 27, 2017

EC published Regulation (EU) 2017/2395 on transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds and for the large exposures treatment of certain public-sector exposures denominated in the domestic currency of any member state. This Regulation was published in the Official Journal of the European Union and amends Capital Requirements Regulation (CRR: Regulation (EU) No 575/2013). To enable the transitional arrangements provided for in this Regulation to be applied from January 01, 2018, this Regulation should enter into force on the day following that of its publication in the Official Journal of the European Union. It shall apply from January 01, 2018.

The application of IFRS 9 may lead to a sudden significant increase in expected credit loss provisions and consequently to a sudden decrease in institutions’ common equity tier 1 (CET 1) capital. In its resolution of October 06, 2016 on International Financial Reporting Standards (IFRS) 9, the European Parliament called for a progressive phase-in regime that would mitigate the impact of the new impairment model of IFRS 9. Where an institution’s opening balance sheet on the day that it first applies IFRS 9 reflects a decrease in CET 1 capital as a result of increased expected credit loss provisions, including the loss allowance for lifetime expected credit losses for financial assets that are credit-impaired, as defined in Appendix A to IFRS 9 as set out in the Annex to Commission Regulation (EC) No 1126/2008 (7), compared to the closing balance sheet on the previous day, the institution should be allowed to include in its CET 1 capital a portion of the increased expected credit loss provisions for a transitional period. That transitional period should have a maximum duration of 5 years and should start in 2018. The portion of expected credit loss provisions that can be included CET 1 capital should decrease over time down to zero to ensure the full implementation of IFRS 9 on the day immediately after the end of the transitional period. Institutions should decide whether to apply those transitional arrangements and inform the competent authority accordingly.

It is also appropriate to provide for transitional arrangements for the exemption from the large exposure limit available for exposures to certain public-sector debt of member states denominated in the domestic currency of any member state. The transitional period should have a duration of 3 years starting from January 01, 2018 for exposures of this type incurred on or after December 12, 2017, while exposures of this type incurred before that date should be grandfathered and should continue to benefit from the large exposures exemption. Institutions that decide to apply the IFRS 9 transitional arrangements specified in this Regulation should publicly disclose their own funds, capital ratios, and leverage ratios both with and without the application of those arrangements, to enable the public to determine the impact of those arrangements.

 

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Effective Date: December 28, 2017

Keywords: Europe, EU, Banking, Accounting, IFRS 9, Transitional Period, CRR, Own Funds, Large Exposures, EC

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