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The Impact of IFRS 9 on Banks Across the EU and Implementation Challenges Samuel Da-Rocha-Lopes1
Introduction In 2016, the European Union adopted2 the IFRS3 9 after the respective IASB publication in 2014. Banks under IFRS were required to apply IFRS 9 as of the starting date of the bank’s first financial year beginning on or after January 1, 2018. The benefits of the new accounting regime are several. The incentives to improve the credit appraisal processes, the monitoring of under-performing exposures and credit impairments, as well as the capital and business planning were improved. Transparency and the enhancement of market disclosures to the stakeholders were also promoted. A key aspect to embrace the benefits of the new accounting regime is the high-quality implementation of the process. A key concern for the banking sector was that the application of IFRS 9 could lead to a sudden and material increase in expected credit loss (ECL) provisions. As an immediate consequence, this would cause an abrupt significant decrease in Common Equity Tier 1 (CET1) capital and ratios for many banks. We should bear in mind that the significant improvement of the CET1 ratios after the financial crisis was an important achievement for the EU banking sector. The implementation of the IFRS 9 could challenge such a positive evolution and destabilize the banking sector, so the concerns were understandable. At the same time, while discussions proceed on the longer-term regulatory treatment of provisions, transitional arrangements were introduced in order to smooth the implementation of the IFRS 9 in the EU. These transitional arrangements for five years (between 2018 and December 2022) allow banks to mitigate the potential significant negative impact on CET1 arising from ECL accounting. In the meantime, EU banks have made further progress4 on the implementation of IFRS 9. In 2017, as expected, smaller banks were still lagging behind in their preparation compared with larger banks. Various data, processes, and models are used to estimate expected credit losses. Similarly to the IRB models in the calculation of capital requirements, the variability of approaches will affect comparability among banks and, therefore, disclosures are key. It is crucial that stakeholders have sufficient
