European law change needed to keep banks lending
20 April 2020: without changes to the Capital Requirements Regulation, efforts to ensure IFRS 9 Financial Instruments can be applied in a way which reflects the reality of the effects of coronavirus support measures may not be enough.The International Accounting Standards Board, the European Securities and Markets Authority and the Prudential Regulation Authority have all weighed in on how IFRS 9 can be flexed to properly represent the Government support and regulatory recommended relief measures aimed at keeping banks lending so that individuals and businesses can weather the liquidity crunch created by COVID-19
On 3 April 2020, the Basel Committee on Banking Supervision published their recommended measures to reflect the impact of COVID-19. In the words of the committee, “the guidance seeks to ensure that banks reflect the risk-reducing effect of the exceptional measures when calculating their capital requirements. It also sets out the amended transitional arrangements for the regulatory capital treatment of ECL accounting, which will provide jurisdictions with greater flexibility in how to phase in the impact of ECL on regulatory capital.”
Given the attention paid to the impact on expected credit losses and the measures allowed, the regulatory capital treatment also needs consideration. The Basel measures are widely thought to be sensible. The measures around transitional relief could be particularly helpful. However, for the measures to be affected, they need to be allowed by National Competent Authorities, which requires a change in the Capital Requirements Regulation.
ICAEW’s Financial Services Faculty and Europe office have been consulting stakeholders to understand the views of different institutions and policymakers about the changes which may be required.
Last week, the European Commission suggested a series of amendments to the Capital Requirements Regulation to reflect international changes, such as the year-long delay to the Basel III capital standards, plus flexibility in accounting for expected losses. These are likely to be “fast track” amendments and include a revision to the IFRS9 transitional percentages (increasing up to 100% for the next two years).”
Whilst this is an immediate priority, it will be difficult to predict when/how the amendments will be made and when they will be effective, so until then, it is a case of “watch and wait” for banks.
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