- Posted by admin
- On September 13, 2017
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- #BaselIV, #IFRS9
The last posts of our Basel IV Series mainly focused on specific topics like FRTB and others. In contrast, this post tries to bridge the gap between different requirements and perspectives of Accounting and Regulation. With upcoming Basel IV revisions in the credit risk space as well as IFRS 9 going live next year, we at Value3 feel there is a need for banking professionals to understand differences as well as overlaps in detail.
Background and next steps regarding IASB and BCBS alignment
Standard Setters and Regulators, namely the IASB and the BCBS, start to appreciate the need for closer alignment as indicated in the recent signing of an Memorandum of Understanding. While from the Accounting side IFRS 9 puts considerable pressure on smaller banks regarding modelling requirements – forward PD curves, incorporation of macro scenarios to name just a few of various challenges – the Basel Committee, as well as global regulators’ approach goes towards reducing reliance on overly complex internal models. In this regard, the European Central Bank just started the EU-wide Targeted Review of Internal Models (TRIM).
Regulatory vs. Accounting Credit Risk View
In order to appreciate the matter holistically, we take a short step back to certain basic objectives of Banking Regulation vs. Accounting/Financial Reporting.
Financial Reporting and Banking Regulation & Supervision are closely linked, since regulatory capital calculation utilize financial statement figures with certain adjustments (prudential filters). Loan Loss Provisions are the key accrual item in a Bank‘s financial statements, which have a significant impact on Earnings, as well as Regulatory Capital. Due to the interlinkages, Accounting Standard Setters and Regulators are both concerned about the estimation of LLPs and capital requirements, but they have a different perspective on the matter.
- Financial Reporting’s primary Objective is to provide information that is useful and reliable for investors, creditors, regulators, etc. Respectively, accounting LLPs should be free from bias in any direction and are concerned with Expected Loss.
- Banking Regulation’s primary Objective is to reduce the level of risk for depositors and ensure financial stability. Respectively, regulators generally prefer more conservative/higher, i.e. upward-biased capital requirements – they are mainly concerned with Unexpected Loss.
Regulatory and Accounting (IFRS 9) Modelling Differences
In addition to the direct effect of LLPs on a bank’s equity capital, and respectively regulatory capital ratios, there are additional interlinkages for Banks using internal models for Credit Risk Regulatory Capital calculation (IRB models). Although, Basel Regulation is mainly concerned to counteract Unexpected Loss, it incorporates an Expected Loss Calculation based on the same parameters like IFRS 9 – Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD). Although, same parameters are used, the estimation of these is quite different due to the different objectives. The below table depicts the main parameter differences as well as interlinkages of Basel and IFRS 9 Expected Loss calculations.
Value3 supports IFRS 9 ECL modelling implementation tailored to emerging market needs as well as TRIM preparation for European markets
Do you need support regarding IFRS 9 implementation or TRIM? At Value3 we conduct tailored trainings, perform portfolio assessments and model validations and provide customized, high-performance and cost-efficient SaaS, in-house or hybrid risk technology solutions. In case of interest to know more, don’t hesitate to REACH OUT.
Meet us for thought exchange at public events
From Value3 we are regularly providing our views and insights on international conferences, masterclasses and public corporate trainings. Our current focus is to bridge the gap of credit risk modelling for IFRS 9 and Regulatory purpose. Below you find a brief overview of related recent and upcoming public engagements across Europe, Middle East and Asia. We would be pleased to engaging with you in person soon.
- July 2017: Masterclass in course of the Pan-Asia Conference on “Auditing Regulatory Reform in Banking” with IFRS 9 focus in Singapore
- October 2017: Insights on Basel IV developments in course of the Banking Association for Central and Eastern Europe (BACEE) Conference in Budapest
- October 2017: FinTech, RegTech & Excellence in an Area of Disruption Conference in Singapore
- February 2018: Comprehensive Credit Risk Modelling Masterclass with IFRS 9 and Basel IV focus in Singapore
- March 2018: Comprehensive IFRS 9 Credit Risk Modelling and Business Impacts Masterclass in course of the “Strategic International Financial Reporting Standards – Going Beyond Accounting” Conference in Dubai
If you are interested to know more, don’t hesitate to REACH OUT.
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