Khaleej Times

‘Big Bang’ regulatory changes for banks in the offing

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How does IFRS9 work?

The major change that IFRS9 brings to the table is in the impairment of assets. IFRS 9 adopts a single forward-looking expected credit loss (ECL) model that is applicable to all types of financial instrument­s subject to impairment accounting.

In essence, the new regulation will strongly affect the way in which credit losses are recognised in the balance sheet and profit and loss statement. Under the new regulation, banks are required to move from recognisin­g losses immediatel­y, from an ‘incurred loss’ basis (i.e. when a loss actually happens at a future date) to an ‘expected loss’ basis (i.e. the measured probabilit­y of a loss taking place in future on existing loans).

For example, currently if a bank gives a loan to a customer, there are several ways this can turn into a non-performing loan - i.e. the customer

the new accounting standards will have far-reaching consequenc­es for the entire banking sector, and has forced several banks to prepare for expected credit loss requiremen­ts whilst acting to comply to all of its requiremen­ts

IFRS9 will have also have a significan­t impact on the future behaviour and the business direction of banks. For instance, banks may avoid more risky loans and increase pricing to customers. The regulation will also impact other financial institutio­ns, such as the insurance sector, which will affect how they classify their assets and investment­s.

Overall however, this is a good move by regulators for market stability and transparen­cy. It is a change that is forward looking as opposed to reactive, as in the past, banks have been accused of doing too little, too late, as far as recognizin­g bad assets and providing for them. In contrast, this model is likely to be extremely versatile and will recognise underperfo­rming assets quickly, which was impossible under IAS 39.

Looking ahead

Initially, there is a risk that the size and impact of ECL estimates can lead to material misstateme­nts in bank financial statements. Under IFRS 9 there will be important disclosure requiremen­ts that will need to be adhered to. Luckily, Banks do have experience with ECL - for regulatory reporting and computatio­n of capital adequacy — but there are some difference­s. Banks are also actively working with auditors and adapting technology and systems, to ensure they can identify forward-looking losses in accordance to this model.

With this significan­t regulation set to alter the financial for the better, education on the impact and compliance to these regulation­s will be especially important for banks. At the Emirates Institute for Banking and Financial Studies (EIBFS), we already hosted an interactiv­e workshop earlier this year, on Basel III and the regional implementa­tion of IFRS9. Going forward, there is no doubt that we will continue to include this system into our new curriculum­s for our students and trainees.

 ?? Bloomberg ?? The headquarte­rs of the Bank for Internatio­nal Settlement­s in Basel, Switzerlan­d. Implementa­tion of Basel III regulatory norms, which will drasticall­y alter the way banks do business, will be introduced in the uAE in 2018. —
Bloomberg The headquarte­rs of the Bank for Internatio­nal Settlement­s in Basel, Switzerlan­d. Implementa­tion of Basel III regulatory norms, which will drasticall­y alter the way banks do business, will be introduced in the uAE in 2018. —

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