The Strategist

Most of banks aren't ready to comply with new anti-crisis rules

08/15/2016 - 15:18

Nearly 50% of major banks around the world are not ready to meet new requirements of international financial reporting standards, according to Deloitte. The rules, come into force in 2018, will lead to a sharp increase in reserves.

Almost half of large banks around the world have declared ill-preparedness to implement the new International Financial Reporting Standards "IFRS 9 — Financial Instruments", which contains revised guidelines for valuation of financial assets, including their depreciation, and additional guidance on new principles of hedge accounting. This is stated in a survey conducted by consulting firm Deloitte among 91 banks around the world, except the US banks. Deloitte did not disclose names of the banks. 

The new rules will take effect from January 2018. 46% of respondents do not believe that they have enough resources to bring its performance in line with the new requirements by that time. Some of the market participants noted lack of professionals, who could be employed for this.

Almost two-thirds of respondents said that they cannot accurately predict how the new rules would affect their balance sheet. According to them, banks must record in balance reserves to cover expected losses, not incurred. Some respondents calculated that total amount of allowances for impairment of all assets classes would jump by 25%.

The respondents also fear that the new rules will worsen their capital adequacy ratio. According to their estimates, the Tier I capital (core capital) will be reduced by an average of 0.5%.

According to 99% of the respondents, local financial regulators have not yet clarified how banks can include the IFRS 9 indicators on requirements for regulatory capital.

IFRS 9 — Financial Instruments have been developed to combat effects of the global financial crisis of 2008. Then, the world’s banks were not able to timely recognize losses on financial assets, including on loans, which proved that the existing international accounting system had to be improved. The regulators believe that transition from "already incurred losses" to "expected loss" would help avoid repetition of these problems.

Now, rules for assessing and accounting for the impairment of financial assets are contained in IAS 39. The International Accounting Standards Board decided to replace it with IFRS 9 as the latter is more logical and easy to use. Final version of the new rules was introduced in July 2014.

Within the new model, financial institutions must recognize expected credit losses on initial recognition of the asset. Part of the expected losses (over 12 months) is recognized in respect of all concerned financial instruments since their initial acquisition or issue. Then, the financial institutions orderly assess increasing credit risk of the asset. In subsequent periods, if the risk significantly increases since its initial acquisition, the possible credit losses will be recognized as the final for the entire period of the asset’s circulation.

Steven Hall from KPMG consulting company is sure that the likely increase in reserves caused by IFRS 9 is "arousing alertness". "IFRS 9 requirements will be almost as difficult to perform as to talk about them. Companies must consider a number of scenarios for the future, and in the current economic turmoil, assessment of the consequences (of the new rules) is not an easy task ", - quotes FT.