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IFRS 9

Impact on the Banking Industry

Katrien Schotte
Finance A&R - Policies
9 June 2015

IFRS 9 Classification and Measurement


A move from a complex, rules-based approach to a principle-based model for financial
assets

Same categories / measurement basis as in IAS 39


New classification triggers in common language
Opportunity to align financial reporting on management view
Elimination of the Held-to-Maturity category
Accounting treatment of liquidity portfolios

Missed opportunities ?

Bifurcation of embedded derivatives limited to financial liabilities


Guidance for recognition/derecognition carried over from IAS 39

Potential impacts

More full fair value or rather more amortised cost ?


Equity and regulatory capital may be affected by inclusion of unrealised gains/losses under
CRD IV
Impact on KPIs because of more volatile profit or loss / equity
Comparability across the banking sector may be affected

Departement |

10/06/2015

IFRS 9 Impairment
Fundamental redesign moving from an
incurred loss model to an expected loss
model

Addresses the too little, too late issue of IAS


39 and the cliff-effect

Incurred loss model

Expected loss model

Nevertheless there are some concerns

Lack of convergence between accounting and regulatory expected loss models


Standard guidance for calculation of expected loss significant increase in credit risk
Estimating expected losses requires a very significant degree of judgement

Conceptual and implementation challenges

Assessment of significant increase in credit risk


Review and change methodology for measuring 12-month expected loss
Estimate lifetime expected loss including forward looking information
Extensive disclosure requirements

Departement |

10/06/2015

IFRS 9 Impairment
The Basel Committee on Banking Supervision (BCBS) Guidance on Accounting for
expected credit losses

Requires highest-quality implementation of an ECL accounting framework from internationally


active banks and those banks more sophisticated in the business of lending
No use of practical expedients e,g. for low credit risk exposures(small/large banks and portfolios)
Use of reasonably available information on the basis of undue cost or effort overruled
Expectation of full integration between credit risk practices and finance reporting challenging given the
conceptual differences (PiT vs TTC)

No guarantee of improving usefulness of the information

Potential impacts

Cliff-effect on first-time adoption


Volatility in profit or loss
Impact on capital, hence on the cost of capital and thus most likely on the pricing of loans
Impact on regulatory capital still unclear
Lack of comparability within an entity and across the banking sector
Lack of convergence with US GAAP

Departement |

10/06/2015

IFRS 9 Hedge Accounting


Removal of some of the burdens in IAS 39 to bring hedge accounting more in line with the
entitys risk management

Relaxation of effectiveness testing requirements in particular elimination of the bright line test
of 80-125% to demonstrate hedge effectiveness
Rebalancing instead of discontinuation and re-designation
Extension of scope of hedged items:
Aggregated exposures including derivatives eligible as hedged item
Expansion of fair value hedge of net positions / layers of hedged items

Hedging instruments: less volatile profit or loss because of the exclusion of time value of
options and forward points
Hedge accounting remains an option, but voluntary de-designation will be prohibited if risk
management remains unchanged

Changes work out well for corporates and less for banks

The absence of new guidance for macro hedges, even though mitigated by accounting policy
choice to continue with IAS 39 for portfolio hedges of interest rate risk
Extensive new disclosure requirements to ensure comparability

Potential impact

More hedge accounting as it becomes less onerous ?

Departement |

10/06/2015

IFRS 9 Implementation
Implementation is challenging

Cross-disciplinary involvement (Finance, IT and Risk)

Strong co-ordination needed between Finance and Risk to ensure credit data quality

Interaction with BCBS #239 on risk data aggregation and risk reporting

Interpretation of IFRS by regulators (ECB and BCBS)

Restatement of comparatives over 2017


Not required by IFRS 9
Peer pressure
Regulators

Impact across the organisation

Departement |

10/06/2015

IFRS 9 Impact on the Banking Sector


Impact on the financial statements

Classification and measurement: more products at amortised cost ?

Disappearance of held-to-maturity

Return to basic product features

Impairment: Estimating impairment is an art rather than science.

Hedge accounting

Opportunity to translate economic hedges into hedge accounting

Estimated impact ?

Banks have been waiting for the final standard to start the implementation
Dependent on economic conditions at date of first-time adoption

Interdependencies and impact on the banking business

Business impacts: product catalogue and product pricing


Liquidity regulation: impact on leverage ratio and NSFR
Capital management
First-time adoption impact on equity followed by volatility in profit or loss
Capital instruments
Capital planning

Interaction with the changing banking business and economic environment


Departement |

10/06/2015

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