By Huw Jones
LONDON (Reuters) – EU regulators will problem banks over their failure to correctly apply an accounting rule aimed toward ensuring their provisioning for souring loans is well timed and ample, the bloc’s banking watchdog mentioned on Friday.
The European Banking Authority (EBA) mentioned its second report into how the IFRS 9 rule, which was designed to answer a central lesson arising from the worldwide monetary disaster of 2008, uncovered the identical shortcomings as its preliminary evaluate.
IFRS9 is a worldwide accounting rule that requires loans on a financial institution’s books to be measured towards going market costs and recognise a portion of any ‘anticipated’ loss over the approaching 12 months, and for them to provision for this upfront.
Full provisioning is required if there’s a important enhance in credit score threat, that means the mortgage may default, and failure to correctly apply the rule makes it tougher for regulators to find out if banks have made ample provisioning, and finally have the required capital ranges.
“These analyses have additionally confirmed the existence of sure practices that elevate prudential issues, as already detected within the final monitoring train, inside totally different components of the IFRS 9 framework that haven’t been addressed by many establishments but,” EBA mentioned in a press release.
The EBA’s findings come at a time when some debtors are going through difficulties with repayments after rates of interest have risen quickly from document lows, making loans dearer.
Supervisors in EU states will comply with up on the principle findings, it mentioned.
The evaluate discovered a excessive degree of ‘changes’ or ‘overlays’ – banks utilizing their judgement to tweak outcomes from their threat fashions – which may delay shifting to full provisioning.
“Totally different practices have been noticed by way of dangers consideration, approaches adopted for his or her calibration and degree at which these overlays are utilized. This will forestall reflecting any extra sources of threat,” EBA mentioned.
EBA mentioned Banks have been additionally too reluctant to make so-called “collective” evaluation of dangers throughout a portfolio of loans when threat information on particular person loans is simply too sketchy.
This was a “concern from a prudential perspective”, it mentioned.
So-called backtesting — or checks on the accuracy of how IFRS 9 is utilized to see if anticipated loss fashions want relcalibrating — additionally wants bettering, it added.
(Reporting by Huw Jones; Modifying by Alexander Smith)
