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IFRS 9 resolution carried by European Parliament

The proposed resolution regarding IFRS 9 'Financial Instruments' was just carried in the plenary session of the European Parliament in Strasbourg. The European Parliament think tank that produces supporting documents to help shape new European legislation has published an issue of its 'At a Glance' series that deals with the endorsement of IFRS 9 'Financial Instruments'. The document offers some general background on the topic and then links to the following additional documents and studies for a deeper understanding of the endorsement of IFRS 9 Financial Instruments:

  • The Basis of the Endorsement Procedure for IFRS Accounting Standards
  • IFRS Accounting Standards Endorsement Procedure
  • Changes to Accounting & Solvency Rules: (possible) Impact on Insurance & Pensions
  • IFRS Endorsement Criteria in Relation to IFRS 9
  • The Significance of IFRS 9 for Financial Stability and Supervisory Rules
  • Impairments of Greek Government Bonds under IAS 39 and IFRS 9: A Case Study
  • Accounting for Financial Instruments: the FASB and IASB IFRS 9 Approaches
IFRS9 could free up reserves for GCC banks

Banks operating in Gulf Cooperation Council (GCC) countries may face lower loan loss requirements under IFRS9 rules because these may well be less onerous than current provisioning requirements, says Fitch Ratings.
Under IFRS9, when a loan is first made or acquired, it is assessed for expected losses over an initial 12-month period and an up-front provision is booked automatically, triggering an immediate capital hit.
Positively for most GCC banks, the impact of having to write provisions up front will not be that significant because they are already used to booking general reserves when they extend new loans.
But even so regulators may not be willing to allow the write-back of existing reserves because they are keen for banks to preserve existing buffers to protect themselves against unexpected losses. We think the toughest supervisors, such as those in Kuwait and Saudi Arabia, are likely to be reluctant to allow banks to cut back on their current high levels of loan loss reserves once IFRS9 is enforced. A compromise between auditors and regulators may have to be reached.
Switching to IFRS9 will be challenging for GCC banks. The absence of a long default history in many countries, coupled with difficulties in correctly assessing collateral values and timeframes for realisations, makes it particularly tricky to assess expected loan losses. Banks are working closely with their auditors and adapting technology and systems to make sure they can plug data gaps to model forward-looking losses.
Of course, the new clauses introduced have been devised for good reasons. The norm forces banks to properly hedge against future credit risks, thus reducing the dangers of said risks. The institutes therefore will have to calculate their profit more cautiously.
A sensible improvement keeping the financial crisis and the condition of European banks in mind. But IFRS 9 comes at a difficult moment exactly because European banks are currently under pressure. When IFRS9 comes into force in January 2018, GCC banks will be required to recognise and provide for expected credit losses on loans. They currently report under IAS39, which means they write provisions when losses are incurred, and face supplemental additional requirements set by local regulators. These vary from country to country, but generally mean that banks need to establish general, collective reserves calculated as a percentage of total gross loans and off-balance-sheet commitments.
A 1% general reserve on all on-balance-sheet loans is required in Kuwait (plus a 0.5% reserve on off-balance-sheet exposures) and Saudi Arabia, while Oman differentiates by type of loan, applying a higher 2% reserve for higher-risk personal loans.
In UAE, banks need to hold reserves equivalent to at least 1.5% of weighted credit risks - this generally works out at below 1% of gross loans because facilities extended to public sector entities are 0% risk weighted - while Bahrain and Qatar adopt a more bespoke approach.
We consider the Kuwaiti regulator particularly tough and loan loss coverage ratios for the Kuwaiti banks are ample, around 260%. This is due to the Central Bank of Kuwait's unique requirement for additional case-by-case "precautionary" provisions, which depends on the outcome of portfolio reviews.
Regulators in Kuwait, Bahrain, Oman, Qatar and the UAE are also conducting impact assessment tests, but results of the studies have not yet been disclosed.

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