Long have the banks been under strict reporting requirements by international governing bodies, however the introduction of IFRS9 may change this.
All major banks are now going to have to proactively identify credit losses that have previously occurred but also forward-looking, future losses, simply ensuring they are safeguarded against loans that have already been written.
IFRS 9 will cover financial institutions across Europe, the Middle East, Asia, Africa, and Oceania, the US is an exception to this and Japan they are allowed voluntary use. Within Europe, many banks are under strict instruction from the European Central Bank stress tests and asset quality review, resulting in putting aside far more capital.
IFRS9 is the replacement of IAS39, this includes hedge accounting, derecognition, impairment, recognition and measurement. This IASB has added the final touches to IFRS9 in response to the financial crisis, incorporating a new forward looking ‘expected loss’ impairment model. The key idea of this is to reform hedge accounting to with enhanced protection around risk management.
Mark Williamson, Interim Head of Capital Planning, State Street has had his say on the impact of IFRS9, “For most of us the memory of the transition to IFRS from UK GAAP is a distant one. Let us not forget the pain we went through from a governance perspective in making that switch. The financial reporting team had to wind the winch, the forecasting guys had to navigate obstacles created by the switch and the Board had to demonstrate the steered course was a good one!
IFRS9 is probably the biggest change to financial reporting since original IFRS transition. This time round it will be the same crew for banks and insurers but with some new deck hands. The reclassification of assets on the balance sheet will create a new set of challenges for enterprise risk management. As night follows day, risk weighted assets follow IFRS9 asset classification. And then we wake up to the impact on the ICAAP and SFCR.”
All banks across the board, will be having to change the way they conduct business, especially looking closer at the management of loans and allocating capital. Major changes will come in terms of infrastructure, reporting, modelling and data management.
Banks will have to look at their credit loss impairment modelling approach between Basel III and IFRS 9 while ensuring co-ordination across all major divisions of the bank. Successfully managing these anticipated challenges will allow senior management to make more informed forward-looking decisions minimising the stressed conditions when they appear. We feel that a strong consistent capital planning analysis should lead to less risk allowing banks to better place their capital and work more efficiently.