MNB Issues IFRS 9 Guidance on Loan Classifications in Context of COVID
MNB amended a Circular on the use of macroeconomic factors and on the application of factors indicating a significant increase in credit risk, in connection with IFRS 9. By amending the circular, MNB has set minimum requirements for the calculation of impairment levels and introduced flexibility to its prudential expectations related to impairment. From July 27 to the end of next year at the latest—that is, December 31, 2021—market participants in credit institutions will be able to use these modification measures aimed at mitigating the effects of the COVID-19 emergency. The circular applies to domestic banks and credit institution branches.
According to the MNB impact assessment, without jeopardizing the stable, safe, and prudent operation of the banking system, these recent measures could reduce the level of impairment of credit institutions by up to HUF 120 billion, improve the capital position, and increase lending capacity; this may help to reduce the economic effects of the pandemic. Although the new measures will remain in force until December 31, 2021, the central bank may, based on the current situation, decide to revoke them earlier. The following are the key highlights of the guidance, as explained by MNB in its press release:
- To preserve prudent practice, MNB has set an expected minimum level of impairment, which must always exceed the level of impairment projected on the stock data for the first quarter of 2020 multiplied by the average impairment coverage at the end of last year.
- In connection with macroeconomic forecasts, the central bank expects banks to apply macro-paths along several scenarios and to use the weights assigned to each scenario, which can be calculated in addition to the MNB macroeconomic forecasts (if duly justified) with their own complex macroeconomic models.
- The central bank reaffirmed that banks are still expected to apply a strong corporate governance system based on management responsibility.
- Banks are also expected to ensure transparency in their financial statements when applying assumptions and judgments concerning their models, impairment levels, and estimates of uncovered portfolios, when calculating losses, applying credit risk measures, and reclassifications due to increased risk.
- The unchanged expectation of MNB is that credit institutions identify their risks in relation to their exposures in a timely, consistent, and comparable manner. In line with this, in the current context of calculation uncertainties, it is good practice for banks to also set a portfolio-level lump sum expected loss value for their portfolio for which their model is likely to underestimate expected losses.
Related Links (in Hungarian)
Keywords: Europe, Hungary, Banking, Accounting, IFRS 9, Financial Instruments, SICR, Credit Risk, COVID-19, Loan Moratorium, Payment Deferrals, Impairment Calculations, MNB
Featured Experts
Masha Muzyka
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Anna Krayn
CECL adoption expert; engagement manager for loss estimation, internal risk capability enhancement, and counterparty credit risk management
Previous Article
EBA Proposes Standards on Indirect Subscription of MREL InstrumentsRelated Articles
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
FCA Sets up ESG Committee, Imposes Penalties, and Issues Other Updates
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
FSB Reports Assess NBFI Sector and Progress on LIBOR Transition
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.
