IFRS 9: Six variables to watch in a stress test
The Financial Services Faculty looks at six aspects of the Bank of England stress test and how the interaction with IFRS 9 Financial Instruments may differ in a real stress.
In the UK, 2018 was the first year banks reported their results under the new International Financial Reporting Standard, IFRS 9. However, it has so far only had a limited impact on banks' credit provisions and their common equity tier (CET1) capital ratios, both in financial reporting and under stress.
Low unemployment and low interest rates may be part of the reason. Secondly, a long period of benign conditions means models used to predict losses have been built on unrepresentative data, which does not reflect how credit risk changes through an economic cycle. Providing the data points to calibrate the models appropriately may unfortunately require a real recession.