EBA impact assessment of IFRS 9 estimates 18% increase in provisions for EU banks

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Banking alert | 11 November 2016

EBA observations

The European Banking Authority (EBA) has published the results of its impact assessment on IFRS 9, launched in January 2016. The sample of banks consisted of 58 banks across 20 EEA countries with total assets ranging from approximately €10 billion to €2 trillion. 91% of the banks surveyed were either Global Systemically Important Institutions (G-SII) or Other Systemically Important Institutions (O-SII). Furthermore, most of the banks in the sample use both a Standardised Approach (SA) and an IRB approach for measuring RWAs for credit risk.

Main observations of the impact assessment exercise

The results of EBA’s impact assessment show that the estimated increase of provisions is on average 18% (and up to 30% for 86% of the respondents) compared to the current levels of provisions under IAS 39. Furthermore, the common equity tier 1 (CET1) ratios are expected to decrease on average by up to 59 basis points (bps) (and up to 75 bps for 79% of the respondents).

These key quantitative impacts are mainly driven by the new impairment methodology under IFRS 9 which requires banks to follow an expected loss model, in contrast to the incurred loss model under IAS 39. Under IFRS 9 banks account for Expected Credit Losses (ECLs) from the point exposures are first recognised, and periodically update provisions for significant increases in credit risk according to the three-stage model.

Other key findings from the impact assessment include the following:

  • The smaller banks surveyed are lagging behind in their preparation compared to larger banks.
  • 75% of the banks included in the survey anticipate that IFRS 9 impairment requirements will increase volatility in profit or loss.
  • Data quality and availability are the most significant challenges for banks. Specifically, risks to data quality primarily stem from the expected use of different sources of data from different departments. Risk data aggregation is a key area under the new Supervisory Review and Evaluation Process (SREP), which requires banks to be compliant with BCBS 239 principles.

Deloitte’s IFRS 9 Software Solution: Finevare

Finevare is a comprehensive industry-strength software solution developed by Deloitte to support banks in their transition to IFRS 9. As an open solution, Finevare supports an integrated modular approach for data management, provisioning, reporting, accounting and can be further leveraged for business-driven benefits based on statistical analysis and reporting of historical data.

Provisioning functionality includes the following:

  • Finevare’s model of expected loss estimation is designed to easily incorporate various methodological assumptions and a range of risk parameters modelling techniques:
    • Individual components of expected loss model can be either estimated directly in Finevare (based on historical data) or manually configured/loaded from external sources.
    • Available range of different sophistication levels allows to align the methods to the client’s data availability, local regulatory requirements and specific needs.
  • Scenario analysis and stress testing of results allows to better capture potential future impact.
  • Finevare’s functionalities enable deep insight into the root causes of provision level changes through individual components stressing as well as comprehensive scenario analysis.
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