* IFRS 9 published by Intl Accounting Standards Board
* Rule requires banks to set aside some capital on day one
* Also requires full loss on loan to be taken if risks rise
* EU endorsement needed to apply new rule in Europe
By Huw Jones
LONDON, July 23 Banks must provision for souring
loans much earlier under an international rule published on
Thursday that will take effect in 2018, a decade after a global
financial crisis the accounting reform seeks to stop recurring.
The collapse of Lehman Bros in 2008 highlighted how little
capital banks held to cover a slump in the value of the assets
on their books, forcing the public to bail out many lenders.
Amid a welter of regulatory reforms following the crisis,
the Group of 20 leading economies (G20) called for a single
global accounting rule that would force lenders to make
provisions for souring loans much sooner after a loan is made,
so banks have time to plug any capital gaps.
The downside is that bank results will become more volatile,
given that lenders have habitually delayed taking losses on bad
loans partly to smooth their reported profits over time.
A majority of banks surveyed by accountants
Deloitte expect their provisioning to rise by up to
half, under the rule, known as IFRS 9, published by the
International Accounting Standards Board (IASB) on Thursday.
The IASB, whose rules are applied in over 100 countries,
including Europe but not in the United States, said it was its
final reform in response to the 2007-09 crisis.
The rule will require banks to set aside some capital to
cover loans on day one, and recognise full lifetime losses on
the loan if risks have increased, such as if a repayment is more
than 30 days late.
In the run up to the crisis, banks only made provisions when
a loss had been incurred, typically at the point of default.
Accountants warn the change will lead to banks holding more
capital, as well as causing bigger swings in their financial
"The focus on expected losses is likely to result in higher
volatility in the amounts charged to profit or loss, especially
for financial institutions," accounting firm EY said.
Banks will have to use far more judgement on the likelihood
of losses, which is typically tied to the business cycle.
"Where this really comes into play is where you at the start
of economic decline, which is where the current incurred loss
model would be slow to respond but the new expected loss one
would be quicker to react," said Andrew Spooner, lead financial
instruments partner at Deloitte.
The new rule also scraps the ability of banks who use IASB
accounting standards to book a profit on their bonds if they
fall in value, reflecting a counterintuitive rationale that they
could be bought back more cheaply than previously.
Although the new rules won't formally come in until January
2018, regulators and investors may put pressure on lenders to
move early to allay compliance concerns, Spooner said.
Since the financial crisis, bank supervisors already force
lenders to make provisions above the level required under
accounting standards and Spooner expects this pressure to top up
provisioning to continue even under the new book-keeping rule.
Still, Andrew Bailey, chief executive of Britain's
Prudential Regulation Authority, a banking watchdog, said the
reform should improve provisioning so supervisors can focus more
on unexpected losses.
"I hope that implementation of the new accounting standard
for provisioning ... is a step in this direction," Bailey said.
The EU will need to endorse the rule for it to be applied in
the 28-country bloc, a step that could take some months.
Despite a G20 push, the IASB and its U.S. counterpart, the
Financial Accounting Standards Board, failed to agree on a
common global provisioning rule. The United States is taking a
tougher line with its GAAP accounting rules to force banks to
make full provisioning from day one.
"For investors it will be harder to benchmark companies and
understand and compare the financial position of IFRS reporters
and those applying U.S. GAAP," said Nigel Sleigh-Johnson, head
of faculty at the ICAEW, an international accounting body.
(Editing by David Holmes)