Impact of IFRS 9 on banking sector regulatory capital

Article

The impact of IFRS 9 on banking sector regulatory capital

A drain on resources?

The scope of this article applies to banks and building societies (banks) that are prudentially supervised according to Basel Committee for Banking Supervision (BCBS) rules and prepare financial statements in accordance with International Financial Reporting Standards that include “IFRS 9 Financial Instruments.”

Executive Summary

It is widely expected that IFRS 9 will increase the stock of credit impairment provisions. Four-fifths of banks expect their stock of retail and corporate impairment to rise, with one in six preparing for a 50 percent increase or more.1 As a result, we expect many banks to suffer a decline in regulatory capital, with EBA Quantitative Impact Study (QIS) respondents expecting an average 79 basis point reduction in their Tier 1 ratio.

This paper describes the interaction between accounting credit impairment and regulatory capital, in which banks must be well versed to avoid an unexpected capital shortfall. This is particularly important given the challenging regulator environment, as part of which automatic dividend caps are imposed on banks that fail to meet increasingly stringent capital requirements.

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