CSSF Views Of IFRS 9 Implementation By Credit Institutions
In the summer, we looked at IFRS 9 from the point of view of the investors. Here, we bring you the insightful and valuable findings shared by our local regulator CSSF in their IFRS 9 follow-up study covering 126 banks. In this blog we focus on their findings related to the qualitative aspects of IFRS 9. If you are interested in the quantitative impact, read more here.
Qualitatively speaking
Calculating ECL (Expected Credit Losses)
The CSSF found that most banks covered in general all required points regarding the methodology used to calculate ECL, but one or more items (e.g. the calibration of input parameters, the discounting factor or the scenarios) have been disregarded by some banks. It identified that 23% of banks had inaccuracies in their ECL calculation including minor rounding errors to issues around the formula itself (no discounting or omission of interest accruals, for instance).
The regulator identified that forward-looking/macroeconomic information, which should be incorporated during the assessment of significant increase in credit risk (SICR) and/or ECL calculation, had been missed by over a quarter of banks.
The challenge here is that the information needs to be relevant for the particular financial instruments (or group of financial instruments), and it is not easy to determine relevant factors to be considered in all cases. What's more, the information should be reasonable and supportable, and sometimes it is judgmental to decide what information satisfies the mentioned criteria.
Imagine a bank wants to factor in an uncertain future event (e.g. a no-deal Brexit scenario). It would need to assess the impact on the credit losses associated with the event. On the other hand, a bank shouldn't skip forward-looking/macroeconomic information just because the modeling of the impact is difficult. Another important finding is that some banks missed important items including selection and correlation of relevant factors as well as the risk-weights attributed to scenarios.
SICR & transfer between stages
The CSSF found that a large majority of banks appropriately defined the SICR and the criteria for transferring between different stages. All...
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