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
Masha Muzyka
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
Anna Krayn
CECL adoption expert; engagement manager for loss estimation, internal risk capability enhancement, and counterparty credit risk management
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
Previous Article
FDIC Reports Analyze Growth of Nonbank Lending in USRelated Articles
BCBS Amends Guidelines on Sound Management of AML/CFT Risks
BCBS amended the guidelines on sound management of risks related to money laundering and financing of terrorism (ML/FT).
EBA Guidelines on Treatment of Structural Foreign Exchange Under CRR
EBA finalized the guidelines on treatment of structural foreign-exchange (FX) positions under Article 352(2) of the Capital Requirements Regulation (CRR).
FSB Issues Statement on Impact of COVID-19 Crisis on Benchmark Reform
FSB published a statement on the impact of COVID-19 pandemic on global benchmark transition.
IAIS Publishes List of Internationally Active Insurance Groups
IAIS published the list of Internationally Active Insurance Groups (IAIGs) publicly disclosed by group-wide supervisors.
FED Temporarily Revises FR Y-9C With Respect to PPPLF and CARES Act
FED has temporarily revised the reporting form on consolidated financial statements for holding companies (FR Y-9C; OMB No. 7100-0128).
EC Launches Consultation on Review of Solvency II Directive
EC launched a consultation on the review of the key elements of Solvency II Directive, with the comment period ending on October 21, 2020.
ECB Consults on Supervisory Approach to Consolidation in Banking
ECB launched a consultation on the guide that sets out supervisory approach to consolidation projects in the banking sector.
PRA Letter Sets Expectations on Approach to Managing Climate Risks
PRA published a letter that builds on the expectations set out in the supervisory statement (SS3/19) on enhancing banks' and insurers' approaches to managing the financial risks from climate change.
US Agencies Finalize Amendments to Swap Margin Rule
US Agencies (Farm Credit Administration, FDIC, FED, FHFA, and OCC) finalized changes to the swap margin rule to facilitate implementation of prudent risk management strategies at banks and other entities with significant swap activities.
IAIS on Package for 2020 Data Collection on ICS and Aggregation Method
IAIS published technical specifications, questionnaires, and templates for 2020 Insurance Capital Standard (ICS) and Aggregation Method data collections.
