Featured Product

    ESRB Report Examines Cyclical Behavior of ECL Model in IFRS 9

    March 18, 2019

    ESRB published a report that examines the concerns about procyclicality from the expected credit loss (ECL) model in IFRS 9, including the possible sources of procyclicality and its relevance from a financial stability perspective. The report also incorporates the recent information on the implementation of IFRS 9 by EU banks.

    Given the limited experience with IFRS 9 to date, this report focuses on describing the aspects of the ECL model under IFRS 9 that could potentially contribute to procyclical bank behavior, along with the conditions under which such behavior would be more likely to arise. The report is focused on the impact at the onset of a downturn because it is a crucial time for the exacerbation of the depth and duration of a financial crisis. The report concludes that a substantial degree of uncertainty exists about the cyclical behavior of the ECL model in IFRS 9 and its impact on bank behavior. Stress tests and targeted and harmonized disclosures are effective tools to improve the understanding of this cyclical behavior. So far, experience of IFRS 9 is limited but points to the following three factors that are important in shaping the cyclical behavior of ECL approach in IFRS 9 and, therefore, may warrant closer monitoring and review going forward:

    • The principles-based nature of IFRS 9, with particular reference to the conditions and criteria that trigger the transfer of exposures from stage 1 (12 month expectation) to stage 2 (lifetime expectation) and further into stage 3, which, in turn, could facilitate a delay in loss recognition.
    • The ability of, and incentives for, banks to promptly incorporate into their ECL models all new information available on the expected trend of the economic cycle and to recognize losses in a timely manner under IFRS 9 (if recognition of credit losses is delayed because of inadequate modeling or improper incentives).
    • The use of point-in-time (PIT) estimates for expected credit losses should generate more volatile outcomes than through-the-cycle estimates, although that volatility should not be judged as negative per se and becomes less relevant if a bank has anticipated the downturn.

    The report also concludes that the policy analysis should focus on how the requirements of IFRS 9 are being applied and whether banks have appropriate incentives to recognize credit losses in a timely manner. As IFRS 9 has only been applied since January 01 2018 and in a period of benign macroeconomic conditions, it is still too early to say whether IFRS 9 poses a real risk to financial stability and, therefore, requires prompt regulatory intervention. However, early evidence points to issues that regulators and supervisors may want to monitor closely going forward. These issues, which relate to the quality of foresight in banks’ ECL models, concern lack of information (for example, due to insufficient data or inherent behavioral biases to overweight more recent conditions or not consider tail events) and perverse incentives (that is, management incentives to avoid excessive volatility or adverse market perceptions rather than to build sufficient foresight into ECL estimates). The development of best practices or enhanced guidelines could make a positive contribution to ensuring that the financial stability benefits of IFRS 9 are reaped.

     

    Related Link: Report (PDF)

     

    Keywords: Europe, EU, Accounting, Banking, Procyclicality, ECL, IFRS 9, Credit Risk, Financial Stability, ESRB

    Featured Experts
    Related Articles
    News

    EBA Updates Filing Rules for Supervisory Reporting

    The European Banking Authority (EBA) published version 5.1 of the filing rules for supervisory reporting.

    October 19, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Procedures for Collection of AnaCredit Data

    The European Central Bank (ECB) Guideline 2021/1829 on the procedures for the collection of granular credit and credit risk data has been published in the Official Journal of European Union.

    October 19, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Procedures for Collection of AnaCredit Data

    The European Central Bank (ECB) Guideline 2021/1829 on the procedures for the collection of granular credit and credit risk data has been published in the Official Journal of European Union.

    October 19, 2021 WebPage Regulatory News
    News

    EBA Publishes Standards on Disclosure of Investment Policy Under IFR

    The European Banking Authority (EBA) published the final draft regulatory technical standards on disclosure of investment policy by investment firms, under the Investment Firms Regulation (IFR).

    October 19, 2021 WebPage Regulatory News
    News

    APRA Finalizes Guidance for New Prudential Standard on Remuneration

    The Australian Prudential Regulation Authority (APRA) published the prudential practice guide CPG 511 to assist banks, insurers, and superannuation licensees in meeting requirements of CPS 511, the new prudential standard on remuneration.

    October 18, 2021 WebPage Regulatory News
    News

    OCC Updated LIBOR Self-Assessment Tool for Banks

    The Office of the Comptroller of the Currency (OCC) published a bulletin that provides an updated self-assessment tool for banks to evaluate their preparedness for cessation of the London Interbank Offered Rate (LIBOR).

    October 18, 2021 WebPage Regulatory News
    News

    TCFD Updates Guidance for Financial Disclosures on Climate Risk

    The Financial Stability Board (FSB) published a report that examines the progress made toward disclosures aligned with recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

    October 14, 2021 WebPage Regulatory News
    News

    BCBS Report Examines Progress on Adoption of Basel III Framework

    The Basel Committee on Banking Supervision (BCBS) published the progress report on adoption of the Basel III regulatory framework in member jurisdictions.

    October 14, 2021 WebPage Regulatory News
    News

    ACPR Implements Updates Related to DPM Version 3.1

    The French Prudential Supervisory Authority (ACPR) has implemented, in its information system, updates linked to the Data Point Model (DPM) version 3.1.

    October 14, 2021 WebPage Regulatory News
    News

    EBA Note Examines Transition Risks of Benchmark Rates

    The European Banking Authority (EBA) published a thematic note that aims to identify and raise awareness of the transition risks of benchmark rates, as the London Interbank Offered Rate (LIBOR) and the Euro Overnight Index Average (EONIA) are close to being phased out.

    October 14, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7571