IFRS 9 will have a substantial financial impact on banks and create implementation challenges. By taking an optimal approach to compliance, banks can balance the financial impact and the effort required and still ensure compliance. To achieve this goal, banks will need significant support from technology. In this paper, we explore the software functionality needed to support optimal IFRS 9 compliance for banks.
Across the globe, large financial institutions are working to understand the implications of the latest impairment requirements introduced by IASB as part of the IFRS 9 package. According to a recent Deloitte industry survey (see Figure 1), this single, forward-looking “expected loss” impairment standard will have a significant financial impact for the majority of large banks.
Given that IFRS 9 requirements will be effective Jan. 1, 2018, banks are beginning to pay greater attention to this new accounting standard; as shown in Figure 1, IFRS 9 implementation budgets doubled during the last 12 months. But as discussed in this paper, any steps they take toward IFRS 9 compliance should not be taken in isolation, but rather in the context of existing regulatory pressures. With Basel III, CCAR, stress testing, BCBS 239 and other requirements, banks are already exposed to high levels of regulatory scrutiny and devoting substantial attention to compliance efforts.
Finally, it is expected that key jurisdictions will implement similar impairment approaches to IFRS 9, with the most relevant being the FASB’s Current Expected Credit Loss project.
These initiatives will combine to broaden the scope of banks that need to implement ECL-based impairment approaches.
Historically credit risk portfolios have been managed within separate lines of business, creating silos of activity separate from market and operational risk. Credit risk models supported the management of loans and workflow – from origination and scoring, to risk grading, price optimization and underwriting. Loss reserves were primarily monitored and managed using internal ratings and factors linked to loan covenants, or otherwise managed through hedging and securitization.
This siloed approach, however, can lead to consequences – as we lea ...
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