FINMA Introduces New Approach to Expected Credit Losses for Banks
The Swiss Financial Market Supervisory Authority FINMA is reorganizing the provisions on accounting principles for banks by adjusting the method for forming value adjustments for default risks by adopting new approaches to expected losses or inherent default risks. To achieve this, the existing circular on accounting for banks is being replaced with a principles-based ordinance and a streamlined circular. FINMA has published the new and definitive FINMA Accounting Ordinance and the fully revised “Accounting – banks” circular. The ordinance and circular will come into force on January 01, 2020.
The Accounting Ordinance contains the fundamental provisions on valuation and recognition while the Circular sets out the current position of FINMA on accounting and disclosure issues. FINMA is issuing these standards in its role as the accounting standard-setter for banks in Switzerland. A transitional period of a maximum of six years is applicable for the formation of value adjustments for expected losses or for any additional value adjustments for inherent default risks. FINMA is changing its approach to forming value adjustments for default risks for non-impaired receivables to tackle weaknesses in the current system, particularly the risk of a procyclical effect due to late impairment charges. The new approaches to the formation of value adjustments for default risks in the Swiss standards are significantly simpler and more principles-based by comparison.
Furthermore, the new approaches to the formation of value adjustments for default risks are designed to be proportional. Only systemically important banks are required to model the expected losses in detail in their credit portfolios. Those involved in the consultation process particularly welcomed this proportionality and the methodical discretion granted to them. FINMA included individual elements of the explanatory report in the ordinance at the request of those involved in the consultation process. However, it decided not to include more detailed definitions in connection with the new approaches to value adjustments as it was requested to, since this would restrict the intentionally granted freedom in the choice of method and be at odds with the principles-based approach.
Related Links (in German)
Effective Date: January 01, 2020
Keywords: Europe, Switzerland, Banking, Accounting, G-SIBs, IFRS 9, Credit Risk, Expected Credit Loss, Proportionality, FINMA
Featured Experts
Metin Epözdemir
Metin Epözdemir helps European and African banks with design and implementation of credit risk, stress testing, capital management, and credit loss accounting solutions.
Masha Muzyka
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
Jacob Grotta
Risk-measurement and structured-finance expert; experienced financial data analytics executive
Previous Article
FDIC Reports Analyze Growth of Nonbank Lending in USRelated Articles
HKMA Enhances Loan Guarantee Scheme to Alleviate Pressure on SMEs
HKMA announced that enhancements will be made to the Special 100% Loan Guarantee of the SME Financing Guarantee Scheme (SFGS) and the application period will be extended to December 31, 2021.
EBA Proposes Standards for Supervisory Cooperation Under IFD
EBA launched consultations on the regulatory and implementing technical standards on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms.
BoE Sets Out Plan to Transform Data Collection from Financial Sector
BoE has set out a three-phased plan to transform data collection from the UK financial sector over the next decade.
BIS Issues Updates on Technology Initiatives on Cross-Border Payments
BIS recently made a couple of announcements with respect to the planned and ongoing work in the area of financial technology.
ESRB Updates List of Macro-Prudential Measures in February 2021
ESRB updated the list of national macro-prudential measures applied by each member state in the European Economic Area.
BoE Survey Shows Positive COVID Impact on Outsourced Banking Services
BoE has set out results of a survey on the impact of COVID-19 events on the use of machine learning and data science.
ECB Issues Opinion on Proposal to Regulate Crypto-Asset Markets in EU
In response to a request from the European Council and Parliament, ECB published an opinion on the proposed regulation on markets in crypto-assets.
APRA Announces Aggregate Committed Liquidity Facility for Banks
APRA announced the updated aggregate amounts for the 2021 Committed Liquidity Facility (CLF) established between the Reserve Bank of Australia (RBA) and certain locally incorporated authorized deposit-taking institutions that are subject to the Liquidity Coverage Ratio (LCR).
ECB and UK Authorities Agree on Post-Brexit Supervisory Cooperation
ECB published supervisory Memorandums of Understanding (MoUs) with UK as well as other European and non-European authorities.
EIOPA Outlines Strategic Supervisory Priorities for Insurance Sector
EIOPA identified business model sustainability and adequate product design as the two EU-wide strategic supervisory priorities.
