thOn 18 December 2015, the Basel Committee for Banking Supervision (BCBS) published its final

insights on sound credit risk and accounting practices associated with the implementation of

Expected Credit Losses (ECL) accounting frameworks, replacing the earlier guidance issued in June

2006 on ‘Sound credit risk assessment and valuation for loans’.

In this post, we will be highlighting and deliberating upon some of the key issues which have been

discussed in the BCBS guidance note, and their impact on various banks:

BCBS advocates high quality implementation of IFRS 9 standards

ISSUE 03

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The Committee has acknowledged that earlier, ‘incurred loss model’ was implemented across various jurisdictions, and in some cases, implemented with significant differences within the same jurisdiction. For this reason, the Committee has emphasized on the importance of high-quality, robust, and consistent implementation of ECL accounting framework, at internationally active banks across all jurisdictions.

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The Committee has stressed on ‘periodical supervisory prudential review’ of the methodologies adopted by various banks for ECL estimation. Therefore, supervisors are not expected to pre-approve banks’ ECL accounting model, and this implies that banks have to support all their methodologies and assumptions with strong documentation.

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We have also published a white-paper for our esteemed readers, which explores in detail all the key aspects discussed by the

Basel Committee, and our view on the same. It can be accessed from https://www.linkedin.com/company/aptivaa, “Aptivaa

whitepaper on BCBS guidelines for IFRS 9”.

In the coming week, we will be discussing identification of different stages of impairment.

This space aims to answer your queries pertaining to IFRS 9 principles. In case, you have any queries pertaining to IFRS 9 which

you wish to discuss, do leave your comments.

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The Committee has not provided any exemption bucket for compliance to accounting standards, and therefore, all the lending exposures should be considered for ECL estimation.

From our extensive experience, we understand that many banks have some part of their lending exposure outside the purview of rating systems. To meet the specified requirements, banks may have to invest in highly skilled human resources along with upgradation of existing systems, or development of new systems.

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The Committee has explicated that due consideration should be given to the principle of materiality, and exposures (individual or portfolio exposure) cumulatively presenting a material exposure to the bank, should not be considered immaterial.

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The Committee has recognized that supervisors across jurisdictions may adopt a proportionate approach with regard to the guidelines issued to banks of different scale and complexities.

However, as per our view, it is very evident from the publications of the Committee that it acknowledges that the ‘one size fits all’ approach is not expected to be advocated by supervisors. Accordingly, every Bank would need to define its own prescriptive model to identify target state across the range of methodologies varying in sophistication for ECL estimation.

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The Committee has also acknowledged that ECL accounting framework is symmetrical in nature, and it will be allowing reversal of allowances for the first time. However, this initiative from the Committee is expected to introduce some volatility in the P&L statement of the banks.

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The Committee expects that banks should have robust policies and procedures in place for validation of models, thus maintaining its rigor stance for model governance framework, consistent with the requirements for Basel II IRB purposes.

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The Committee has clearly outlined that Banks need not necessarily identify or model every possible scenario, or use industry-wide stressed scenarios, but should rather consider all the relevant forward-looking information and macroeconomic forecasts, which could impact the ECL assessment.

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The Committee has also explained that delinquency data is generally backward looking and is a lagging indicator of significant increase in credit risk. In this regard, it expects that banks will not use more-than-30-days past-due rebuttable presumption as a primary indicator for transfer to LEL, and will consider each of the 16 classes of indicators in IFRS 9, as set out in paragraphs B5.5.17 (a)–(p).

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The Committee considers that the long-term benefit of a high-quality IFRS 9 implementation far outweighs the associated costs, which should therefore not be considered undue.

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Contact: IFRS9.Insights@aptivaa.com | Website: www.aptivaa.com | www.linkedin.com/company/aptivaa