Welcome to the seventh edition of Risk Perspectives™, a Moody’s Analytics publication created by risk professionals for risk professionals.
One of the Seven Sages of Ancient Greece, Periander, has said, “Be moderate in prosperity, prudent in adversity.” This is the mantra that underlies the actions of global accounting standard setters as they implement some of the biggest changes to bank accounting in recent history. The changes to the impairment standards are a direct response to the global financial crisis, when many financial institutions built insufficient loan loss reserves based only on historical loss experience. The new accounting standards are aiming to make loan loss provisions counter-cyclical by incorporating forecasts of economic conditions into provision calculations.
Almost two years into IFRS 9 implementation, with a looming deadline in 2018, full impacts of the transition are still difficult to measure. Of the three elements of the new standard, Hedge Accounting, Classification and Measurement, and Impairment, the last appears to be most challenging. Our survey of regional banks, on page 28, found that 80% of respondents were still in early stages of planning for IFRS 9 compliance. Another recent industry survey conducted by Deloitte found that while some banks expect increases in provisions of up to 25%, over half of respondents could not quantify impact yet. One thing is clear: complexity of calculations required by the new accounting standard is forcing institutions to rethink their processes and systems and often reorganize their resources. A process that was historically managed by an Accounting team alone with input from Risk functions, will now be a joint effort between Risk, Finance, and Accounting. Hence the theme of this edition. We know this is top of mind for industry participants and, as a result, we dedicate this issue to IFRS 9 Impairment and the next issue to its US counterpart, Current Expected Credit Loss standard, finalization of which is expected in the summer of 2016. Convergence of risk and finance functions is also driven by regulatory-mandated improvements to capital and liquidity planning, as well as resolution and recovery planning. This is why this theme is also shared by our annual Risk Practitioner Conference, which will take place in October this year.
The structure of this edition is a bit different from prior ones. You will see that the first section, Spotlight, is focused squarely on implementation of the new accounting standards, IFRS 9 and CECL. The rest of the magazine is split in three sections. Principles and Practices is a section dedicated to case studies and implementation approaches. Here, Nancy Michael details the changing landscape of small business lending and how banks can better compete with alternative lenders. In Innovation Zone, our “looking ahead” section, Sam Malone describes an innovative methodology using compound scenarios to assess counterparty risk. And finally, in Regulatory Review, we look at guidance and standards, already issued and on the docket, that will affect risk management practices in the coming year.
We hope you enjoy the articles and the new format. As always, I encourage you to take part in this conversation and help us shape future issues of Risk Perspectives by sharing your feedback and comments.
Senior Director and Team Lead, Capital Planning and Stress Testing
Risk, Accounting, and Actuarial Solutions
CECL adoption expert; engagement manager for loss estimation, internal risk capability enhancement, and counterparty credit risk management