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
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