September 27, 2016 / 12:00 PM / 3 years ago

Banks, investors demand answers on IFRS 9

* New accounting rules poorly understood

* Banks, investors want to know reg capital impact

* Bankers see inconsistency with Basel IV regs

By Tom Porter

LONDON, Sept 27 (IFR) - Banks and their investors are still in the dark over the impact of IFRS 9 accounting rules, which will force lenders to book expected losses on assets from day one and are barely understood less than two years before implementation.

IFRS 9 represents a sea change in the way banks govern and report the asset side of their balance sheet, and could also have a material impact on regulatory capital requirements.

The new rules become binding at the start of 2018, and there is growing concern about the sheer lack of understanding across the industry.

In a snap poll before a panel on the subject at Fitch’s global banking conference in London last Thursday, some 44% of the audience said they had “no understanding” of IFRS 9.

“This is a big deal,” said Adrian Docherty, head of FIG advisory at BNP Paribas, speaking on the panel.

“Volatility of provisions, either in hypothetical stress tests or in real stress, could be significant. You are bringing forward the bad news.”

IFRS 9, which is governed by the International Accounting Standards Board, will require banks to model credit loss risk based on expected rather than incurred losses.

Lenders will effectively have to mark assets such as consumer loans to market from day one, and disclose their values in quarterly reporting.

Initially that will mean setting aside provisions for any losses expected in the next 12 months, but this will rise to an estimation of lifetime expected losses if there is a “significant increase in credit risk” on the asset.

LACK OF INFORMATION

Volatility in the book value of loans under IFRS 9 could feed into sharp movements in banks’ debt and share prices when changes in expected losses are revealed.

“People will need to learn not to freak out if banks move into negative equity on loans,” said Docherty, “as they are effectively moving potential future profits off the balance sheet.”

Investors are impatient for banks to communicate how the rules could impact their balance sheets, but banks have in turn argued they are short on information from regulators.

Sondra Tarshis, head of accounting developments at HSBC, said on the panel that IFRS 9 was an “enormous task” and banks themselves were short on information.

“Everyone is aware of the desire to get more information out there,” she said, “but we have to do it in a way that is reliable as any disclosures are part of audited financial statements.

“We need regulators to stop telling us how to do the standard and tell us what the capital impact will be.”

PLANNING BEHIND

A global survey of banks by consultants Deloitte in May concluded that 60% “either did not or could not” quantify the impact of the new rules.

Andrew Spooner, lead IFRS partner at Deloitte, who was also on the panel, said that some larger banks could start publishing numbers in quarterly results during 2017.

But Deloitte’s survey, which questioned 91 lenders including 16 global systemically important banks (G-SIBs), also suggested some 40% of them were not planning to disclose quantitative information before the implementation date on January 1, 2018.

CAPITAL INCONSISTENCY

One European bank investor at the conference told IFR he wanted more guidance from regulators on whether IFRS 9 would impact banks’ regulatory capital requirements under Basel III.

He wanted to know, for example, if extra provisioning would be reflected in a bank’s Supervisory Review and Evaluation Process (SREP) requirement - a minimum capital level the European Central Bank assigns each European bank based on periodic reviews of factors like profitability and liquidity.

“Say you’re a European bank and you’re working to a 12% SREP requirement,” said the investor.

“You identify a risk to a certain asset class or economy and you raise provisions by 100bp. Is your SREP requirement now 11%? Because that is not a loss, that is an extra layer of capital you’ve put aside.”

AT LOGGERHEADS

The aim of the move to more proactive accounting is to prevent banks taking years to book bad loans, as has been the case in Europe following the financial crisis.

But many on the sidelines at the conference pointed out the apparent inconsistency between IFRS 9 and what banks have dubbed ‘Basel IV’ - revisions to the final Basel III framework that aim to take judgments on the riskiness of certain assets out of banks’ hands.

As it stands, IFRS 9’s expected losses will be based on banks’ own models, which one senior FIG banker at the conference told IFR put the new rules “completely at loggerheads” with the attempt to standardise risk modeling under Basel IV.

As one example the banker pointed to Swiss mortgages, which typically have three-year terms and are regularly refinanced, meaning banks could take that three-year period as their ‘lifetime’ exposure.

“There is huge scope for arbitrage,” he said. (Reporting by Tom Porter, editing by Helene Durand, Robert Smith.)

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