Five reasons why your IFRS 9 project may have already failed

Life is full of surprises – some good, and some not so good. From an accounting point of view, surprises are generally best avoided. This is not least because they skew insights about commercial performance, and that can lead to inaccurate business decision-making and planning.

IFRS9, introduced in January 2018, was designed to help organisations, including banks, avoid surprises presented by loan defaults, as well as the problems they experienced with its predecessor IAS39. Under the previous regime, loan defaults were only reported in organisations’ charts of accounts when they happened, rather than being anticipated and planned for in advance.

IFRS9 has split banks into two camps: those that took it as an opportunity to look more holistically at departmental convergence between Risk and Finance. And others that took a more ‘stop gap’ tactical approach to compliance, involving more manual checking and work during every reporting cycle. If you belong to the latter, you may have unwittingly also reduced your chances of turning the regulation into a growth opportunity by digitalising the risk management function and using risk adjusted performance measures throughout the bank.

This simple checklist will tell you if your IFRS9 project is future-proof or has already failed:

1. You have no tools to control or analyse provisions

If you are still burdened with making additional provisions for deteriorating or bad loans without having any tools to control and analyze them, you are also likely to lack portfolio restructuring and rebalancing intelligence to optimize it.

2. Every reporting cycle requires the same or more resources than for IAS39

In this case, your IFRS9 project has increased operational risks and resource costs due to a dependence on manual tasks without much automation and pro-active management of your portfolio.

3. You have no mechanism to analyse and control P&L volatility

If you cannot anticipate and forecast credit stage downgrades and cannot act quickly to understand and fix the problem without affecting the performance of your balance sheet, this means your project has failed to curtail profit and loss volatility – leading to a huge reputational risk.

IFRS9 requires banks to categorise loans into stages depending on their creditworthiness. The loans move from one stage to another if their credit risk increases or decreases. By analysing data available from daily or even monthly monitoring, you can begin to model events over the whole life-cycle of a loan and assess their risk more accurately.

When you start integrating these models within standard business workflows, you will find outputs can yield valuable insights on the factors driving the creditworthiness of your portfolio. You will be better prepared to adjust your balance sheet to avoid excessive profit and loss volatility.

4. No risk adjusted portfolio and profitability

If you cannot forecast your portfolio and profitability on a risk-adjusted basis, your ability to analyse true risk-adjusted performance is blurred. This also means you cannot allocate correct funding for low-risk well performing business lines.

It all starts with prudent credit modelling, and the aim to make better decisions day-to-day about lending risks and enforcing tighter governance and control. Once proper modelling and governance are established, banks can start to understand how to incorporate risk into the cost of a loan on an individual basis. This will enable you to adjust target market segments and/or the expected profit margins to become more competitive on a risk-adjusted basis.

5. You have poor data quality

You cannot trust the full spectrum of your impairment analysis due to incomplete, inaccurate or late data. This may have been the same situation under IAS39, but with IFRS9 this is now leading to operational risk and poor and inaccurate provisioning numbers. This in turn could be leading to conservative product pricing, ultimately missing an opportunity to become more competitive.

If any of the above ring true, you are not alone. Many banks have implemented IFRS9 in a tactical way, simply to meet the challenging compliance deadline. That means they have failed to automate and optimise processes that would have given benefits to all stakeholders involved – CFO, CRO, and heads of various business lines.

But there is still time to turn the ship around.