The Financial Stability Institute (FSI) of BIS published a paper examining a range of prudential policy issues that may need to be considered once banks migrate to expected credit loss (ECL) provisioning under International Financial Reporting Standard (IFRS) 9. The paper also presents the findings of an FSI survey on provisioning practices in Asia.
The paper outlines the key challenges to the implementation of ECL provisioning and explores a range of prudential policy considerations that may be useful for all supervisory authorities planning to adopt ECL provisioning under IFRS 9. Regardless of the policy options being considered, there is a rationale for supervisors to seek powers to impose adjustments to regulatory capital when accounting provisions are insufficient to cover expected losses from a prudential perspective. The paper argues that such powers can help to address supervisors’ prudential concerns while fully respecting the role of the accounting standard-setters in establishing the criteria that governs the valuation of assets and the financial statements of banks.
Loan-loss provisioning practices can materially affect the net income and capital accounts of banks, both of which are used by market participants and supervisors to assess an institution's financial health. The shift from incurred to ECL provisioning under IFRS 9—starting in 2018—is a welcome development. Yet IFRS 9 is a complex standard and subject to significant implementation challenges that also have prudential implications.
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