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IFRS 9 could hike banks’ loan loss provisioning by 50%

BANKS could be forced to set aside as much as 50% more capital to cover possible future losses from bad loans under new accounting rules on credit exposures, research by Deloitte has found.

According to Deloitte’s Fifth Global IFRS Banking Survey, global banks are increasingly concerned that new IFRS 9 rules on credit exposures will lead to a dramatic increase in loan loss provisions that will exceed requirements calculated under Basel rules.

Launched in response to the financial crisis, the new standard – which comes into force in 2018 – replaces the incurred-loss model in favour of a forward-looking approach and includes enhanced guidance for classification and measurement of financial assets, and supplements new general hedge-accounting requirements.

Technical concerns

The research, which is based on the views of 59 banks, 42 of which are IFRS reporters, found that implementation budgets are expected to double in size over the last year and that banks are concerned about a lack of technical resources required for IFRS 9.

Three-fifths said they do not have enough technical resource to deliver their IFRS 9 projects, while a quarter of these doubt there will be sufficient skills available in the market to cover any shortfall. Banks have also indicated that implementation budgets are rising, with total costs doubling in the year since Deloitte’s last survey.

Mark Rhys, Deloitte’s global IFRS banking partner, said: “There will be an interesting interaction between capital requirements and provisions, and a lot of this will depend on how bank supervisors interpret and influence how the rules are implemented. The ongoing efforts of bank auditors and regulators will be critical as they seek to encourage consistent quality upon implementation.”

Mike Lloyd, Deloitte bank audit partner, added there are a number of implementation challenges for the sector.

“Banks have said there needs to be clarity around acceptable interpretation of the new rules and interaction with capital because of the potential impact on business models and implementation planning. Banks’ internal teams – including finance, credit, risk and IT – will need to work closely together to ensure these projects can get off the ground in time for the implementation deadline given the complexity involved and wider business pressures,” he said.

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