Basel Committee IFRS 9 Guidance
Expected credit losses continuously in focus
In December 2015, the Basel Committee on Banking Supervision (‘the Committee’) issued its Guidance on credit risk and accounting for expected credit losses (‘Basel Committee IFRS 9 Guidance’). The Guidance sets out supervisory guidance on sound credit risk practices associated with the implementation and ongoing application of expected credit loss (ECL) accounting frameworks, such as that introduced in IFRS 9, Financial Instruments.
The Committee expects a disciplined, high-quality approach to assessing and measuring ECL by banks. The Basel Committee IFRS 9 Guidance emphasises the inclusion of a wide range of relevant, reasonable and supportable forward looking information, including macroeconomic data, in a bank’s accounting measure of ECL. In particular, banks should not ignore future events simply because they have a low probability of occurring or on the grounds of increased cost or subjectivity.
In addition, the Basel Committee IFRS 9 Guidance notes the Committee’s view that that the use of the practical expedients in IFRS 9 should be limited for internationally active banks. This includes the use of the ‘low credit risk’ exemption and the ‘more than 30 days past due’ rebuttable presumption in relation to assessing significant increases in credit risk.
Obviously, banks keep in continued talks to their local regulator about the extent to which their regulator expects the (below) Banking IFRS 9 Guidance to apply to them.
Principles underlying the Banking IFRS 9 Guidance – in Summary
Basel Committee IFRS 9 Guidance Basel Committee IFRS 9 Guidance Basel Committee IFRS 9 Guidance Basel Committee IFRS 9 Guidance Basel Committee IFRS 9 Guidance
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Principle 1
Responsibility
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A bank’s board of directors and senior management are responsible for ensuring appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate allowances.
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Principle 2
Methodology
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The measurement of allowances should build upon robust methodologies to address policies, procedures and controls for assessing and measuring credit risk
Banks should clearly document the definition of key terms and criteria to duly consider the impact of forward-looking information including macro-economic factors, different potential scenarios and define accounting policies for restructurings
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Principle 3
Credit Risk Rating
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A bank should have a credit risk rating process in place to appropriately group lending exposures on the basis of shared credit risk characteristics
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Principle 4
Allowances adequacy
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A bank’s aggregate amount of allowances should be adequate and consistent with the objectives of the applicable accounting framework
Banks must ensure that the assessment approach (individual or collective) does not result in delayed recognition of ECL, e.g. by incorporating forward-looking information incl. macroeconomic factors on collective basis for individually assessed loans
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Principle 5
Validation of models
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A bank should have policies and procedures in place to appropriately validate models used to assess and measure expected credit losses
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Principle 6
Experienced credit judgment
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Experienced credit judgment in particular with regards to forward looking information and macroeconomic factors is essential
Consideration of forward looking information should not be avoided on the basis that banks consider costs as excessive or information too uncertain if this information contributes to a high quality implementation
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Principle 7
Common systems
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A bank should have a sound credit risk assessment and measurement process that provides it with a strong basis for common systems, tools and data
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Principle 8
Disclosure
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A bank’s public disclosures should promote transparency and comparability by providing timely, relevant, and decision-useful information
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Principle 9
Assessment of Credit Risk Management
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Banking supervisors should periodically evaluate the effectiveness of a bank’s credit risk practices
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Principle 10
Approval of Models
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Supervisors should be satisfied that the methods employed by a bank to determine accounting allowances lead to an appropriate measurement of expected credit losses
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Principle 11
Assessment of Capital Adequacy
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Banking supervisors should consider a bank’s credit risk practices when assessing a bank’s capital adequacy
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Principles underlying the Banking IFRS 9 Guidance
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