Featured Product

    ESMA Chair Speaks on IFRS 9 from Perspective of Securities Regulators

    October 19, 2018

    During his keynote speech at the Banco de Espana in Madrid, ESMA Chair Steven Maijoor discussed the implementation and enforcement of IFRS 9 standard from the perspective of securities markets regulators. He addressed three issues related to the expected credit loss (ECL) model: quantitative impact of IFRS 9; transparency and understandability of the ECL model by investors; and role of auditors and supervisory cooperation.

    In its annual European Common Enforcement Priorities for 2018 year-end, ESMA focuses on some of the application issues of IFRS 9. The focus will be on the need for transparency and disclosures on the assumptions of ECL models and on the key judgments made. Based on the average reported quantitative impact in the financial statements, the introduction of IFRS 9 as of January 01, 2018 had, in most countries, a lower quantitative impact than originally expected. However, the widely reported headline figure of the impact on regulatory capital across the industry might not give the entire picture. Given the complexity of modeling and the role of judgment in determining some of the assumptions used in the ECL calculation, it cannot be excluded that new inconsistencies in the implementation of the provisioning are arising in practice. 

    He then highlighted that multiple scenarios need to be reflected in the ECL modeling, given the non-linear nature of credit losses in response to a deteriorating economic outlook. In this context, he discussed that the last report of the Joint Committee of ESAs on risk and vulnerabilities in the EU financial system identifies repricing of risk premia and potential increase of interest rates as key factors that could negatively affect financial institutions. Thus, it is important that all relevant risks identified are reflected in ECL models. While discussing the transparency and understandability of the ECL model, he highlighted the importance of disclosing material assumptions and judgments made in estimating ECL and emphasized that banks should disclose their approach to setting the criteria for identifying the significant increase in credit risk for material portfolios. He also mentioned that banks should explain how they are taking into account forward-looking information in determining the ECL and that there is a need to disclose information on the multiple scenarios capturing the non-linear nature of the credit losses under the downturn scenario.

    He commented on the scope of the involvement of auditors and supervisors in assessing the ECL model and emphasized the need for close cooperation between supervisors in assessing the implementation of IFRS 9, as highlighted in the 2017 report of ESRB. Supervisors need to step up their efforts in capacity building and gain experience in assessing ECL models. The new ECL model poses challenges for both banking supervisors and accounting enforcers within their respective remits. Accounting enforcers are developing their expertise to scrutinize more complex ECL models used in the financial statements. He believes that communication, cooperation, exchange of information as well as practical experience between accounting enforcers and banking supervisors need to be further reinforced to reflect the increased complexity of the ECL models. This is essential to ensure high quality, consistent implementation of IFRS 9.


    Related Link: Speech (PDF)

    Keywords: Europe, EU, Accounting, Banking, Securities, IFRS 9, Expected Credit Loss, Credit Risk, Disclosures, ESMA

    Featured Experts
    Related Articles

    PRA Publishes Q&A on Property Valuation Requirements Under CRR

    PRA published a set of questions and answers (Q&A) covering common queries regarding residential and commercial property valuations, for the purpose of the Capital Requirements Regulation (CRR), during the period of disruption caused by COVID-19 pandemic.

    May 29, 2020 WebPage Regulatory News
    News

    IOSCO Consults on Outsourcing Principles for Operational Resilience

    IOSCO proposed updates to its principles for regulated entities that outsource tasks to service providers.

    May 28, 2020 WebPage Regulatory News
    News

    MAS Consortium to Develop AI Fairness Metrics for Credit Scoring

    MAS announced that the first phase of the Veritas initiative will commence with the development of fairness metrics in credit risk scoring and customer marketing.

    May 28, 2020 WebPage Regulatory News

    BoE Updates Definitions for BTL Data Collection

    BoE published the Statistical Notice 2020/4 to update the buy-to-let (BTL) Phase 2 and Phase 3 definitions for the Interest Rate Type data item.

    May 28, 2020 WebPage Regulatory News
    News

    FSI Examines Financial Stability Implications of Payment Deferrals

    FSI published a brief note that examines challenges facing the banking sector as a result of the payment deferral programs put in place to support borrowers affected by the COVID-19 pandemic.

    May 28, 2020 WebPage Regulatory News
    News

    PRA Finalizes Policy on Prudent Person Principle Under Solvency II

    PRA published the policy statement PS14/20, which contains the supervisory statement SS1/20 and the feedback to responses to the consultation paper CP22/19 on expectations for investment by firms in accordance with the Prudent Person Principle, or PPP, as set out in the Investments Part of the PRA Rulebook.

    May 27, 2020 WebPage Regulatory News
    News

    EBA on Extending Large Exposure Limits for French Systemic Banks

    EBA published an opinion following the notification by the French macro-prudential authority, the Haut Conseil de Stabilité Financière (HCSF), of its intention to extend a measure introduced in 2018 on the use of Article 458(9) of the Capital Requirements Regulation (CRR).

    May 27, 2020 WebPage Regulatory News
    News

    ECB Highlights NPL Resolution as Key Policy Issue in Post-COVID Europe

    As part of a Research Bulletin on the recent policy-relevant work, ECB published an article that examines the lessons learned from past crises for nonperforming loan resolution in the post COVID-19 period.

    May 27, 2020 WebPage Regulatory News
    News

    RBNZ Publishes Financial Stability Report for May 2020

    RBNZ published the financial stability report for May 2020. This review of the financial system in the country highlights that the economic disruption associated with COVID-19 will present challenges to the financial system.

    May 27, 2020 WebPage Regulatory News
    News

    ECB Updates Guidance on Reporting of Securities Holdings Statistics

    ECB updated the guidance notes for reporting related to the statistics on holdings of securities by reporting banking groups (SHSG).

    May 26, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5231