Looming IFRS Rule Could Drive Increased Loan-Loss Provisions

Banks are predicting that the planned revisions to international accounting standards will have a significant impact on the way they handle loan loss provisioning, according to a recent survey by Deloitte.

Deloitte's Fourth Global IFRS Banking Survey revealed that more than half of the financial institutions polled believe the changes to International Financial Reporting Standards 9, covering financial instruments, could force their loan loss provisions to increase by as much as 50 percent.  Respondents also believe banks may have to boost the amount of capital they hold in reserve as a result of the new requirements. Roughly 70 percent expect the revised requirements to go further than the current IFRS rules.

Expected to address the problem of banks not able to record accounting losses until they occur, the new requirements should cause some banks to see significant increases in loan-loss provisions, International Accounting Standards Board Chairman Hans Hoogervorst told the Financial Times.

Iain Richards, head of governance and responsible investment at London-based Threadneedle Investments, told the Financial Times that the revisions may be “uncomfortable,” but are necessary.

“Under the incurred loss rules, banks are overstating profits up front and not making prudent provisions against expected losses that should have been priced,” Richards was quoted as saying in the Financial Times article.

More than half – 56 percent – of respondents said the new capital requirements expected to be issued soon by the IASB could affect lending pricing, the survey said. However, Deloitte said the survey revealed that just under a quarter of boards “lack knowledge” of the upcoming reforms, scheduled to take effect in 2018. The survey reportedly covered 54 banks in Europe, the Middle East, Africa, Asia, and the Americas.

Roughly half, or 45 percent, of those surveyed said the information on loan loss provisioning will become more difficult to compare as a result of the revisions. Respondents also expressed concerns regarding increased transparency requirements for credit risk information, especially the implementation of those requirements.

Mark Rhys, global IFRS banking partner at Deloitte, said it can pose a challenge for banks to reconcile data from different sources because of various systems used over time.

“Banks' focus is shifting from the technical aspects of the standard to the practical implications of implementing IFRS 9,” Rhys said in a statement.

“Coordinating finance, credit, and risk resources is a major concern, and IT changes will be required to support new measurement and disclosure requirements,” Rhys said. “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.”