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In response to recommendations made by the G20 Leaders and the Basel Committee that accounting standard setters consider modifying provisioning standards to incorporate forward-looking assessments in the estimation of credit losses, both the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have finalised provisioning standards based on expected credit loss (ECL).
The Committee supports the use of ECL approaches and encourages their application in a manner that will achieve earlier recognition of credit losses than incurred loss models while also providing incentives for banks to follow sound credit risk management practices. Nevertheless, the Committee is considering the implications for regulatory capital, as the new accounting provisioning models introduce fundamental changes to banks' provisioning practices.
The consultative document released sets out the Committee's proposal to retain, for an interim period, the current regulatory treatment of provisions under the standardised and the internal ratings-based approaches for credit risk. In addition, the Committee is seeking comments on whether any transitional arrangements are warranted to allow banks time to adjust to the new ECL accounting standards.
In addition to the consultative document, the Committee has issued a discussion paper on policy options for the long-term regulatory treatment of provisions under the new ECL standards. At this stage, the Committee has not made a decision to pursue any of the approaches presented in the paper, and is publishing the paper to elicit feedback from interested stakeholders, which will inform the Committee's future deliberations.
The Committee welcomes comments by 13 January 2017.
Regulatory treatment of accounting provisions - discussion document (October 2016)