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The effect of any such move, the EBA said, would be to unpick any improvements made under IFRS 9 relating to provisions that banks must hold to protect against losses on financial assets such as loans.
The EBA said the commission’s proposal “as it currently stands could be interpreted as allowing institutions to add back [expected credit losses] in stage 3 under IFRS 9”, which would “result in the neutralisation” of the provisioning currently in place under IAS 39.
The EBA added: “However, if an institution decided to apply the transitional arrangements, it would be able to add provisions back to [tier one provisions] and therefore have a positive impact due to IFRS 9.”
The EC published its transitional proposals for IFRS 9 under the auspices of its review of cash reserve ratios. The proposals are intended to lessen the impact of IFRS 9 on capital ratios.
The proposals give institutions – not regulatory authorities – the option to apply the transitional arrangements for a period of five years.
They would allow institutions to add back in to tier one any loan loss allowances classified under stage one or two by IFRS 9.
The International Accounting Standards Board (IASB) launched its bid to replace its existing financial instruments accounting standard, IAS 39, in 2009.
Critics of IAS 39 have argued that its incurred-loss impairment model has caused banks to recognise losses too late.