FSI Brief Analyzes Measures on Expected Loss Provisioning Amid COVID
FSI published a brief report that takes stock of the measures introduced in several jurisdictions to influence the application of expected credit loss (ECL) methodologies amid the COVID-19 pandemic. Several prudential authorities, along with BCBS, have introduced a series of measures to clarify how banks should consider various public and private debt relief programs in their ECL estimates and in their calculation of regulatory capital. This report compares the key features of incurred and ECL methodologies and summarizes the actions taken in the United States and in select IFRS jurisdictions that have adopted ECL provisioning frameworks. The report also reviews the cumulative impact of these measures on the financial metrics of banks.
Many authorities have taken various actions, aiming to mitigate the procyclical impact of the ECL accounting approaches. Those actions also affect the accounting treatment of the various debt relief measures that authorities have implemented to help affected borrowers and industries that are encountering short-term cash flow problems.
- In IFRS-compliant jurisdictions, authorities have issued guidance to clarify how such measures should be considered in implementing ECL methodologies, emphasizing the flexibility allowed under IFRS 9.
- In the United States, authorities have taken various measures to encourage bank lending to consumers and businesses and to provide regulatory capital relief. These measures include providing an option to delay the adoption of current expected credit loss (CECL), mitigating the effects of ECL provisions in regulatory capital, and offering guidance on the treatment of payment holidays and restructured debt.
At the international level, BCBS recently clarified that the regulatory treatment of different payment moratoria and government guarantees in the context of risk-based capital requirements. BCBS members also agreed on certain amendments to the existing transitional arrangements in regard to the recognition of ECL provisions in regulatory capital, to mitigate any potential cliff effects with the application of ECL frameworks in the current environment. These amendments allow jurisdictions the option to add back into the common equity tier 1 (CET 1) capital up to 100% of the provisions attributable to the application of ECL provisioning methodologies in 2020 and 2021. If this option is exercised by all BCBS members, it means that only accounting provisions related to incurred losses will be reflected in the calculation of CET 1 measures of banks in 2020 and 2021.
The cumulative impact of these extraordinary support measures on the provisions, earnings, and CET 1 capital of banks is likely to be significant. The report summarizes the impact of such COVID-19 support measures on provisions, earnings, and CET 1 by presenting two tables, one for IFRS jurisdictions and the other for the United States. The report highlights that regulatory measures should be accompanied by bank-led actions to preserve capital. These initiatives, which have already been taken by some banks in certain jurisdictions include severe constraints on stock buybacks and payments on dividends and bonuses, until the global economy regains its footing. These collective measures should help banks to expand their lending capacity while concurrently boosting their ability to absorb future loan losses. Prudential authorities face difficult trade-offs as they confront the most severe economic crisis in modern times. Encouraging the use of flexibility in applicable accounting standards, while preserving market trust and transparency in the reported financial statements of banks, will be key in fostering both economic and financial stability.
Related Links
Keywords: International, Americas, US, Banking, COVID-19, ECL, CECL, Expected Credit Loss, IFRS 9, Regulatory Capital, BCS, FSI
Featured Experts
Scott Dietz
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
Anna Krayn
CECL adoption expert; engagement manager for loss estimation, internal risk capability enhancement, and counterparty credit risk management
Masha Muzyka
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
Previous Article
ISDA Publishes Factsheet on Benchmark Fallbacks for IBORRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.