The workshop “The new IFRS 9 accounting standard: what risk measures for credit impairment?”, organized by CRIF in Milan on April 14 2016, provided a unique opportunity to discuss how the new context must be interpreted and implemented. A panel of highly qualified speakers from the IFRS Board, the Italian and international supervisors, Italian and European banks, academics explored the impact of the new IFRS 9 accounting principle that since 2018 will replace the current standard for recognition and measurement of financial instruments (IAS 39).
The old standard has proved fragile vis è vis the financial crisis. The idea that future margin income would be enough to cover the average riskiness of performing credit exposure has led to strongly cyclical shocks, that were not adequately anticipated in terms of credit risk provisions. The new IFRS 9 aims at triggering a breakthrough towards a different approach, where current credit exposures are dealt with in a more balanced and perspicuous way. On one hand, even fully performing exposures are now subject to a provisioning scheme (although this is limited to losses expected in the following year). On the other hand, an intermediate step is introduced between the healthy and the sick, to account for credit exposures that, while still not in outright distress, have recorded a significant deterioration in their creditworthiness since their origination (so that the contractual spread is now clearly inadequate to offset future expected losses).
In order to adapt their portfolio of loans and financial securities to the new provisioning scheme, banks will need to develop new risk metrics, calibrating them on the basis of large, robust datasets. The shift from the old system to the new one is bound to trigger significant effects for the profit and loss account – above all upon the first application of the new standard – and for regulatory capital. The devil will hide, as he often does, in the details.
