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The impact of impairment proposals on regulatory capital
Credit institutions’ regulatory capital levels are under the spotlight and will continue to be for the foreseeable future.
The latest impact could arise from the International Accounting Standards Board’s (IASB) recent impairment proposals.
In light of continuing pressure for credit institutions to raise capital ratios, the likely size of the increase in impairment provisions has attracted attention, and the effect of the proposed standard on regulatory capital planning is likely to be significant.
This paper considers the potential impact of the impairment standard and actions that credit institutions can take to prepare for the possible impact on regulatory capital of the proposed standard.
In particular, in summarising the differences between the IASB’s Exposure Draft, issued in March 2013, and the existing Basel treatment of expected losses, the report highlights differences between the Basel and IASB concepts of expected loss (and hence changes that will be required to Basel models in order to comply with the proposed impairment accounting model). It also addresses the impact on the components of the capital framework, such as the calculation of unexpected losses and capital buffers, as well as the impact on institutions that make use of the standardised approach to credit risk.