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The move from IAS 39 to IFRS 9 will impact on capital resources. The impact will differ depending on a bank’s business model and whether it uses the Internal ratings-based (IRB) approach, the Standardised Approach (SA) or a combination of the two approaches.
The relative impact of these differences is as yet uncertain, but it is clear that the move away from an incurred loss model to an expected loss model for credit risk adjustments will lead to an increase in accounting provisions. This will potentially result in material reductions in capital resources under the current prudential regime and subsequently a need for banks to raise additional capital to support ongoing business, without a change in the bank’s risk profile.
The extent to which IFRS 9 impacts are overlaid on top of stress testing requirements, given time horizons for stress periods extend beyond IFRS 9 implementation, will also potentially have a material capital impact from next year on banks’ capital buffers.