* Analysts warn of 300bp capital hit in downturn
* Banks unhappy with interaction between Basel framework and
* "Mother" of IFRS9 says system leaves "no more excuses"
By Tom Porter
LONDON, Jan 12 (IFR) - Analysts have warned the IFRS9
accounting rules slated for 2018 will increase volatility in
bank earnings and capital, but the former Goldman banker tasked
with drawing up the new standards told IFR they are vital to
preventing another crisis.
IFRS9, due to come into force on 1 January 2018, will
require banks to provision against expected losses on loans
rather than wait for a default event, a sea change for European
lenders in particular.
The new accounting standard is completely separate from the
Basel Committee's post-crisis Basel III capital framework, but
market participants fear it will have the unintended consequence
of eroding banks' capital ratios.
"Capital headwinds in a downturn could be much more severe
under IFRS9," Barclays analysts wrote in a note on Monday,
adding that the changes could knock as much as 300bp off
industry-wide common equity tier 1 ratios during a typical
downturn. This would be around three times higher than under the
"There will be plenty of instances when IFRS9 appears to
smooth bank earnings," they said. "But in a bad enough downturn
- or where there's a swift enough deterioration in credit
quality - the provisions taken in good times won't be enough to
Under IFRS9 banks will take a provision charge immediately
on each new loan based on its 12-month expected loss, and will
then take a further lifetime expected loss provision if there is
a "significant deterioration" in asset quality.
The warnings come as many question how IFRS9 will interact
with the Basel III capital framework, which was due to be
finalised by end-2016 but has dragged into this year because of
a disagreement over limits on internal credit risk modelling.
At the moment Basel is not planning to alter those rules to
accommodate the impact of IFRS9, though in October it proposed
phasing in the capital impact over three to five years after
"Basel's work on the phase-in impact of IFRS9 was, in
hindsight, a missed opportunity for them to also address issues
of pro-cyclicality," said the Barclays analysts.
"But there is still time."
MOTHER OF ALL REGS
But for Sue Lloyd, vice-chair of the International
Accounting Standards Board, the focus is on developing a global
framework that allows banks to react more quickly to
deteriorating asset quality.
"Our job is not to get involved in a discussion on
appropriate bank capital levels with the Basel Committee," she
told IFR, "though we do have a close relationship with
prudential regulators because we all care about financial
Lloyd, a former Goldman Sachs managing director, now widely
referred to as the "mother of IFRS9" - not a name she encourages
- says her team was "shocked" by the difference in application
of accounting rules globally when they started looking at the
"For example, Australian banks' application was closer to an
expected loss model than in other jurisdictions," she said.
"And despite the accounting requirements under US GAAP and
IFRS standards being basically the same, the actions of US
prudential regulators led to much larger provisions being booked
in the US."
Many market participants dislike IFRS9 because even though
banks are increasing what they set aside to cover losses, this
is not reflected in their headline capital ratios.
An impact assessment by the European Banking Authority in
November 2016 claimed CET1 ratios will decrease 59bp on average,
and up to 75bp for 79% of its survey respondents.
One suggested solution is for the European Central Bank to
decrease a bank's Supervisory Review and Evaluation Process
(SREP) requirement - a minimum capital level it assigns each
bank - when its provisions rise.
Under the current IAS39 accounting regime, banks' expected
losses are typically higher than what they have provisioned for,
with the capital shortfall deducted from their CET1.
This will not change under IFRS9, according to the Basel
Committee's guidance to banks on implementing the new rules.
However, if provisions exceed expected losses, which is a
possible outcome of IFRS9, banks are rewarded with a boost to
their Tier 2 capital, instead of a CET1 add-on.
While this increases the institution's total capital, banks
feel they do not fully benefit from it because investors care
more about CET1 - the core capital ratio under Basel III which
is now widely used to compare banks with their rivals.
NO MORE EXCUSES
Lloyd points out that the IASB consulted widely with the
industry on IFRS9, publishing three full drafts of the rules and
a discussion paper before its finalised document in July 2014.
During the crisis loan loss impairments came too little, too
late, she said.
"Banks were not allowed to book losses without an actual
loss event occurring and even then, you could only use
historical data and current circumstances - you weren't allowed
to use house price forecasts, for example."
"Under IFRS 9 there will be no more excuses - you have to
use all the information you have available to judge potential
losses from day one."
(Reporting by Tom Porter, editing by Helene Durand, Alex