4 minute read 6 Dec 2017
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How IFRS 9 is impacting banking institutions

EY IFRS 9 Classification & Measurement (C&M) Banking Survey assesses banks’ state of readiness for IFRS 9 implementation, with focus on C&M.

As we have now past the adoption of International Financial Reporting Standards (IFRS) 9 Financial Instruments on 1 January 2018 there is a heightened focus on IFRS 9 Classification and Measurement (C&M).

Although the impact of C&M was expected to be less significant compared to impairment, banks have been focused on addressing requests from regulators, auditors and other stakeholders to demonstrate this with documented evidence.

Banks have become aware that despite limited quantitative impacts, the new C&M requirements pose significant challenges in terms of management judgement and increased complexity of key processes such as the granting of loans and new product development processes.

In April 2017, EY performed an IFRS 9 C&M Survey of 60 banking institutions globally. The survey was undertaken to assess the "state of readiness" in the implementation of their IFRS 9 with focus on C&M. 

Key highlights of the survey

  • Limited reclassifications overall: Out of the limited value reclassified, almost 45% is toward fair value through profit or loss (FVPL), and relates to reclassification from loans and receivables (L&R), held to maturity (HTM), available for sale (AFS) debt instruments to FVPL.
  • SPPI impacts - main trigger for reclassifications to FVPL: Almost 65% of banks say that reclassifications to FVPL are solely due to the SPPI test.
  • Wide ranges of degree of preparation, correlated with the size of the banks: More than 55% of banks haven’t reached the implementation phase for data & system and operating model.
  • Changes in the approval process: Approximately 55% of banks are considering a revised framework for new products.
  • Budget significantly lower than that for impairment: C&M budget is lower than €5m for two third of the banks.

IFRS 9 project status: overall state of readiness

Most advanced phases are solely payments of principal and interest (SPPI) and business model (BM) assessments. Regarding data and systems, operating models, and policy, more than half of the sample has not reached the “implementation” status. Very few banks have reached a “complete” status on data and systems and operating models. 

Wide ranges of degree of preparation needed:

  • Larger banks are more advanced for all phases. At least 50% of them have reached the implementation phase for all the phases. Regarding SPPI and BM assessments, 95% and 80% of respondents have reached the implementation phases respectively. 
  • Small banks are less advanced. Only 30% of them have reached the Implementation for all the phases (50% of them for SPPI and BM assessments only).  

Budget and synergies:

Finally, the overall state of readiness is also influenced by the expected budget, as banks with the larger C&M budgets are more advanced with their programs. The budget for C&M seems to be relatively small compared the total IFRS 9 budget 

  • The total budget (including impairment) is more than 5m € for almost 80% of the respondents, whereas the C&M-only budget is more for only less than 25% of the respondents.
  • Respondents show some uncertainty regarding the cost of implementation of the new requirements, with nearly 20% of banks not able to quantify the expected total budget for C&M (based on the responses "Cannot be isolated from total IFRS 9 budget" and "Undecided"). 

Operating model: impact on governance and products offered or acquired

  1. Most banks have not decided how to validate and authorise the origination of new products. Only 14 banks have decided to modify the processes to validate and authorize the origination of new products based on the new IFRS 9 C&M requirements.  
  2. For those planning to modify current processes, considering the SPPI test as part of the process, the most common actions taken are to:
     - Include the IFRS 9 test outcome in the instrument’s approval documentation
     - Develop specific guidelines to prevent banking book products failing the SPPI test 
  3. Only few European banks intend to amend certain portfolios or instruments as a result of the SPPI test performed. The most common identified features or clauses which they would like to amend relate to non-recourse, hurdle rates, indefinite maturity dates, zero interest rate and variable rates with mismatches.
  • Methodology: IFRS 9 Classification & Measurement (C&M) Banking Survey

    In April 2017, we surveyed 60 major banking institutions worldwide, of which: 

    • 19 have a balance sheet in excess of €600b (hereafter considered "large banks")
    • 12 have a balance sheet between €200b and €600b (hereafter considered "mid banks")
    • 29 have a balance sheet of less than €200b (hereafter considered "small banks") 

    Of the 60 banks: 

    • 14 are global systemically important banks (G-SIBs) 
    • 18 are in the scope of the Sarbanes-Oxley Act (SOX)

    Considering the business profile of the surveyed banks: 

    • 19 participants operate in all banking activities, such as retail, commercial and investment banking, plus to insurance business
    • 12 participants operate in one banking sector only

Summary

Findings of EY IFRS 9 Classification & Measurement (C&M) Banking Survey (PDF) outlines the overall state of readiness of banks to implement IFRS 9, expected reclassifications of IFRS 9, key operating model and policy decisions, and the assessment of business impacts.

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