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.
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Keywords: Europe, Hungary, Banking, Accounting, IFRS 9, Financial Instruments, SICR, Credit Risk, COVID-19, Loan Moratorium, Payment Deferrals, Impairment Calculations, MNB
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