IFRS 9: helping banks support households and businesses
30 March 2020: ICAEW’s Philippa Kelly outlines the PRA’s measures to ensure IFRS 9 Financial Instruments effectively reflects the nature of lending related to COVID-19.
The Prudential Regulation Authority’s ‘Dear CEO’ letter of 26 March provided some much-needed clarity for banks on the application of IFRS 9 Financial Instruments to lending made or modified as a result of COVID-19.
In the letter Sam Woods, CEO of the PRA outlined:
The need for high-quality governance
Additional overlays and post-model adjustments will be necessary to deal with the economic uncertainty created by COVID- 19. This makes developing and probability weighting economic scenarios even more difficult and means traditional drivers of credit risk won’t give an accurate picture of what borrowers may be expected to do in future. Governance needs to be even stronger to ensure the resulting information is robust and consistent.
Banks need to take a balanced approach
Being overly prudent will not be helpful when it comes to economic recovery. The PRA assumes a short, sharp shock, with activity returning to near previous levels, therefore customers should be considered in the long term.
Making use of payment holidays and other government schemes is not a trigger
Difficulties due to COVID-19 are more likely to be temporary. Therefore, in the absence of other indicators that the borrower is unlikely to pay, making use of a payment holiday or other government relief should not trigger a default or be considered an indicator of a significant increase in credit risk.
COVID-19-related covenant breaches are not like normal covenant breaches
COVID-19 presents several auditing and reporting challenges which make covenant breaches more likely. For example, a modified audit report due to COVID-19 issues should not automatically trigger a breach.
The measures in the letter will undoubtedly help ensure the smooth flow of government- promised cash to individuals and businesses suffering because of coronavirus. However, practical and intellectual difficulties remain for banks in ensuring that reporting requirements, and the related capital impacts, don’t act as a barrier to lending.
To further alleviate these, regulators could help to shape a base case scenario for economic modelling. In addition to government-backed support, giving further clarity around the drive for consistency, and how it would apply when banks are extending their own various support mechanisms to customers at this challenging time, would also be beneficial.
For more news, analysis and guidance for accountants on the ongoing COVID-19 crisis visit ICAEW’s dedicated Coronavirus Hub.