Interim regulatory treatment, transitional arrangements, and comment
The Basel Committee consulted in October 2016 on proposals to:
The Basel Committee has now finalised its approach to the first two of these issues. The Committee will return later to the longer-term regulatory treatment of ECL accounting provisions.
The Basel Committee will retain, for an interim period, the current regulatory treatment of provisions. Since ECL accounting does not distinguish between specific and general provisions, regulatory authorities should provide guidance on how they intend to categorise ECL provisions as specific or general in their jurisdiction to ensure consistency among banks within their jurisdiction. This categorisation can then be used when calculating regulatory capital requirements (the Basel capital framework limits the amount of general provisions that can be included in Tier 2 regulatory capital).
The Basel Committee gives jurisdictions the option to introduce a transitional arrangement for the impact of ECL accounting on regulatory capital.
If a jurisdiction does choose to implement a transitional arrangement, then the new Basel standards require that:
The Basel standards offer jurisdictions considerable discretion in choosing whether (or not) to offer banks a transitional arrangement, and if so the calibration of this arrangement.
In the EU, the proposed revised Capital Requirements Regulation (CRR2) introduces a “dynamic” approach to phasing-in the impact of IFRS 9 on banks’ regulatory capital, allowing a proportion of the excess of the impairment loss allowances recognised under IFRS 9 over the expected losses calculated under Basel standards to be added to CET 1 capital. The proportion would decline from 100% in 2018 to 20% in 2022, and to zero thereafter.
This is broadly consistent with the final Basel standards, although the proposed CRR2 text would allow all the incremental expected credit loss allowances calculated under IFRS 9 to be added back into CET1 capital, with no adjustment to reverse out IAS 39 impairment losses that have already been recognised for impaired assets, or to reflect the tax treatment of IFRS 9 impairment losses.
The European Banking Authority published an Opinion on these proposals in March 2017, noting that it would be simpler to adopt a “static” approach and that adjustments needed to be made to the calculation of the “additional” provisions.