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Fitch: IFRS 9 Capital Impact May Differ Widely Across EU Banks
March 21, 2017 / 3:06 PM / 9 months ago

Fitch: IFRS 9 Capital Impact May Differ Widely Across EU Banks

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: IFRS 9 Impact Cushioned by Regulatory Buffer here LONDON, March 21 (Fitch) IFRS 9, the new international accounting standard for financial instruments, could have significantly different impacts on regulatory capital requirements for EU banks, depending on where they operate, their asset quality, how they calculate risk-weighted assets (RWAs) and how much allowance they already make for expected losses, Fitch Ratings says. We expect banks in weaker-performing economies to be most affected by the new requirements under IFRS 9 to provide for expected credit losses. It is too early to estimate the full effects of IFRS 9 on loan-loss allowances, profitability and capital. However, we do not expect IFRS 9 to trigger immediate rating changes, as it does not change the substance of banks' financial positions. Our main measure of capital, Fitch Core Capital, will be lower where IFRS 9 leads to higher provisions, but we will view this in the context of stronger coverage of banks' credit risk. Banks using the standardised approach to calculate RWAs will typically be more affected as the higher expected losses recognised under the new rules will directly hit their common equity Tier 1 (CET1) capital. However, any general reserves already held for loans not yet impaired will dampen the impact. The standardised approach is used to varying degrees across the EU, covering between 6% of portfolios (Dutch banks) and 52% (Spanish banks) based on a 2016 European Banking Authority (EBA) analysis of large EU banks. Among banks using the internal ratings-based (IRB) approach, Irish, Spanish and Italian banks' CET1 ratios appear the most vulnerable, while Swedish, UK, German and Dutch banks and EU global systemically important banks (G-SIBs) are better insulated. IRB banks will only be affected to the extent that expected losses under IFRS 9 exceed the regulatory expected losses (R-ELs) that these banks already calculate and reflect in their CET1 capital. IRB banks with higher R-EL cushions over their existing IAS 39 accounting loan-loss allowances will be therefore less affected by IFRS 9. <iframe allowfullscreen src="//" title="Regulatory Expected Losses - EU Banks" width="800" height="620" scrolling="no" frameborder="0"> R-ELs exceeded IAS 39 loan-loss allowances by 11%, on average, for 59 large IRB banks analysed by Fitch at end-June 2016. This means that the IFRS 9 loan-loss allowance would start to hit CET1 capital for a "sample average" bank in our analysis if it exceeded the bank's IAS 39 loan-loss allowance by more than 11%. We expect most EU banks' CET1 capital will be affected, despite the R-EL cushioning effect - IFRS 9 loan-loss allowances could exceed IAS 39 allowances by an average of 18%, according to the EBA's IFRS 9 impact assessment in 2016. Some banks expect little or no regulatory capital impact from IFRS 9 and surveys suggest that the aggregate impact may be modest across the industry. However, survey bias may understate the impact, with better-positioned banks more likely to participate than those facing a significant impact, and several banks could fare considerably worse than the average. We expect IFRS 9 to make CET1 ratios more cyclical, as IFRS 9 expected losses are "point in time" estimates, in contrast to R-ELs, which are calibrated through economic cycles. Banks' macroeconomic forecasts will influence variation between the two expected loss approaches and therefore the capital impact of IFRS 9. IFRS 9 takes effect on 1 January 2018, requiring banks to set aside allowances covering 12-month expected credit losses for normal performing debt and lifetime expected losses for that with significantly increased credit risk, in addition to the existing requirements for impaired debt. The European Commission has proposed a five-year transitional period for banks to phase in CET1 reductions caused by IFRS 9. The report "IFRS 9 Impact Cushioned by Regulatory Buffer" is available at or by clicking the link above. Contact: Monsur Hussain Senior Director Financial Institutions +44 20 3530 1793 Fitch Ratings Limited 30 North Colonnade London E14 5GN Bridget Gandy Managing Director Co-head EMEA Financial Institutions +44 20 3530 1095 David Prowse Senior Analyst Fitch Wire +44 20 3530 1250 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. 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