BoM published guidance on transitional arrangements for regulatory capital treatment of IFRS 9 provisions for expected credit losses. The transitional arrangements will allow banks and non-bank deposit-taking institutions (financial institutions) to add back a portion of their IFRS 9 provisions to the regulatory capital. These arrangements come into effect on January 13, 2021 and will phase out over a four-year period, with the transition factor turning zero from January 01, 2025 onward. A financial institution shall inform BoM about its decision to elect to apply the transitional arrangements no later than February 15, 2021. The introduction of these transitional arrangements is intended to alleviate the impact of the COVID-19 pandemic on the provisioning levels of financial institutions.
The guidance stipulates that a financial institutions electing to apply the transitional arrangements will be required to make this disclosure this in the audited financial statements. A financial institution electing to apply the transitional arrangements shall refrain from paying dividends and making other transfers from profit until the end of the transitional period or until it opts out of the transitional arrangements. A financial institution shall add back a proportion of Stage 1 and Stage 2 provisions under IFRS 9 to its tier 1 capital. Banks shall add the provisions back to common equity tier 1 (CET1) capital and non-bank deposit-taking institutions shall add the provisions back to the tier 1 core capital. The amount of Stage 1 and Stage 2 provisions to be added back to the CET1 capital or the tier 1 core capital shall be calculated according to the formula set out in the guidance. Annex 1 to the guidance contains examples of calculation for the transitional arrangements.
As per the guidance, Stage 1 and Stage 2 provisions that have been added back to the CET1 capital or the tier 1 core capital should not be included under tier 2 capital. Only the amount of Stage 1 and Stage 2 provisions not added back to the CET1 capital or the tier 1 core capital may be included in tier 2 capital, subject to the guidelines on scope of application of Basel III and the eligible capital and guidelines on capital adequacy ratio for non-bank deposit taking institutions. Financial institutions shall report the amount of provisions added back to the regulatory capital as well as the regulatory capital without applying the transitional arrangements. The reports shall be submitted on a quarterly basis, along with the Returns on Statement of Capital Adequacy Calculation for banks and with the Returns on capital adequacy calculation for non-bank deposit taking institutions, as per the reporting template provided in Annex 2 for banks and in Annex 3 for non-bank deposit-taking institutions.
During the transitional period, a financial institution may elect to opt out of the transitional arrangements but may not elect to apply the transitional arrangements again after opting out of it. A financial institution opting out of the transitional arrangements shall immediately inform BoM of its decision. These transitional arrangements are in line with the BCBS guidance from March 2017 and April 2020.
Effective Date: January 13, 2021
Keywords: Middle East and Africa, Mauritius, Banking, Accounting, ECL, Regulatory Capital, Transitional Arrangements, COVID-19, IFRS 9, Basel, BCBS, BoM
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.
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