Banks expect provisions to rise under new standard

BANKS BELIEVE that loan loss provisions for customer loans will increase under new accounting standards.

Ernst & Young’s survey of ten European banks found nine expect IFRS 9 will increase the provisions and reduce their capital positions.

A key area where banks’ opinions differed was whether poorer quality loans could be recorded with full expected loss provisions on day one. Six said this approach was appropriate as it would align with their operational process for managing loans. The other four thought this would be sound, and loans should only be recorded at a lower grade once their quality has deteriorated.

Despite the differences of opinion and potential effect on their capital position, the banks are broadly in favour of the changes.

Tony Clifford, a partner in Ernst & Young’s financial services assurance team, said: “The survey shows that although there is overarching agreement on the key broad-brush issues surrounding the proposed changes, there are significant disparities in banks’ current reactions to the detail.

“The IASB will need to consider the operational implications of IFRS 9 closely, for example giving careful thought to how banks should account for purchased loans in order to avoid unintended consequences in future bank business combinations.”

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Fiona Westwood of Smith and Williamson.