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Banks expect to set aside more capital following IFRS 9 accounting changes

Forthcoming accounting rules which will govern how banks in Europe book losses are expected to require banks to set aside more capital according to over half the banks surveyed on the issue by auditors Deloitte.

More than 50% of banks questioned believe the International Financial Reporting Standards 9 (IFRS 9) rules will increase the amount that banks have to hold to cover loans by up to 50%, Deloitte said. A total of 70% of banks expect the new provisions "to exceed current regulatory measures, potentially increasing the amount of capital that banks will need to hold", said Deloitte.

The figures are contained in Deloitte’s Fourth Global IFRS Banking Survey which took into account views from 54 banks from Europe, the Middle East, Africa, Asia Pacific and the Americas.

The IFRS 9 Financial Instruments rules are expected to be issued this summer by the London-based International Accounting Standards Board (IASB) and are expected to come into effect in 2018.

The new standard is designed to address concerns which emerged following the global financial crisis when banks were unable to account for losses until they were incurred, even when it was apparent to them that they were going to experience those losses. Under the new loss rules, it is anticipated that banks will be able to make provisions for losses and ensure they are appropriately capitalised for the loans they have already written, according to the Financial Times.

According to the banks surveyed by Deloitte, the anticipated increased capital requirement could drive up the cost of some products. 56% of the banks said the pricing of lending will be affected.  

However almost a quarter of boards are considered to have little or no awareness of the forthcoming change, according to the survey.

Mark Rhys, global IFRS banking partner at Deloitte, said: “Bank boards are dealing with a mass of regulatory initiatives, many of which require immediate action. With IFRS 9 still three years away, the proposals do not yet command attention.”

The survey also found that 45% of banks believe it will be more difficult to compare loan loss provisioning in banks’ financial statements.

Rhys said: “A variety of legacy risk and accounting systems are found in many banks. The sheer range of systems can make it difficult to reconcile data extracted from different sources, something that is compounded when the data quality is poor."

“Banks’ focus is shifting from the technical aspects of the standard to the practical implications of implementing IFRS 9," said Rhys. "Coordinating finance, credit and risk resources is a major concern, and IT changes will be required to support new measurement and disclosure requirements. Three years is most frequently cited as the necessary lead time for all phases of IFRS 9.  A 2018 effective date will put teams under pressure. Work must get under way soon.”

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