24 October 2016

FEE´s response to EBA on the implementation of the expected credit losses model

In FEE´s response to the EBA, FEE is concerned that the scope of application of the proposed guidelines is wider than the scope of the Guidelines issued by the Basel Committee on Banking Supervision on the same topic

Following the publication of Guidance by the Basel Committee (BCBS) in December 2015 on the same matter, the FEE welcomes the initiative undertaken by the EBA to ensure sound credit risk management practices in the EU associated with the implementation and on-going application of the accounting for expected credit losses.

The FEE believes that one of the biggest challenges when applying IFRS is the proper implementation of financial reporting standards, especially those standards which introduce significant changes in the existing financial reporting requirements. IFRS 9’s ECL introduces a new model for impairment for financial instruments. Especially, banks and other financial institutions will face specific implementation challenges as they are exposed to a wide range of different financial assets.

Overall, the FEE has expressed its support to the BCBS principles. Any alignment at EU level should stay as close as possible to the international requirements to ensure consistent interpretations of IFRS 9 and achieve a high-quality ECL model across different jurisdictions. The FEE has the clear expectation that the EBA has not and does not intend to have the authority to establish requirements for financial statements.

The FEE would like to ask for clarifications when it comes to correlations between the prudential and accounting approaches and particularly when it comes to the following EBA reference: “[…] the well-established regulatory capital models for the measurement of expected losses may be used as a starting point for estimating ECL for accounting purposes” (§11, 75). The FEE understands that the expected losses can be used as a starting point for calculating ECL. Nevertheless, it should indeed only work as the beginning of further guidance. Prudential and accounting approaches cannot be similar and it should be noted that there are important differences to be further explained. Additionally, in the future, banks may have to develop and maintain their accounting model on a “stand-alone basis” – especially as the BCBS has been recently moving to more standardised approaches. Therefore, the FEE is not certain about the recommendation that institutions should be using common processes, systems, data etc. to measure ECL for accounting purposes and determine EL for capital adequacy purposes.

Moreover, it remains unclear what will be the prudential treatment of the expected losses impairment accounted for under IFRS 9.

Full comment letter

© FEE