Half of big banks unprepared for accounting shake-up
Nearly half of big banks around the world are unprepared for an international accounting standard due to take force in less than two years, even as they expect provisions for bad loans to soar as a result of the new rules.
A poll of 91 banks across the globe — excluding US banks that are governed by their own rules — has found that 46 per cent of those surveyed do not believe they have enough resources to deliver changes by the 2018 implementation date, with a significant minority going on to say there were not enough skilled candidates in the market to hire.
With less than 18 months to go before the change, nearly two-thirds of banks are unsure how the rules might impact their balance sheets, according to Deloitte, which undertook the global survey.
The rules force banks to have a provision on their balance sheets for expected losses in the future rather than actual losses already suffered.
Those banks that have made the calculations reckon the rules will result in a surge of at least 25 per cent in total impairment provisions across all asset classes.
Banks are also forecasting that the rules, dubbed IFRS 9, will cause their capital ratios to deteriorate: they are expecting core tier one capital — one of the most keenly watched metrics of the health of a bank’s balance sheet — to decrease on average by half a per cent as a result of moving to the new standard, according to Deloitte.
Uncertainty is not limited to the banking industry: 99 per cent of respondents said their local financial regulator had yet to say how they might incorporate IFRS 9 numbers into regulatory capital requirements.
IFRS 9 is part of a suite of measures by the International Accounting Standards Board to overhaul accounting since the financial crisis. The reform package is an attempt to increase regulatory co-operation between the US and international standard setters. Converging the different corporate reporting frameworks has been fraught.
By moving from an “incurred loss” to an “expected loss” model in 2018, under IFRS 9 the regulators hope to avoid the problems that occurred during the crisis, when banks could not book accounting losses until they happened, even though they could see them coming. This should help to keep banks properly capitalised for the loans they have made.
UK banks have experienced historically low impairments recently because of the record low interest rate.
However, there are some concerns that if economic growth were to stall following the Brexit vote, impairments could go up even without the new rules.
Steven Hall at KPMG said the estimated increase in provisions as a result of IFRS 9 was actually “cautious”.
“IFRS 9 will be almost as difficult to implement as it is to say,” he said. “Firms need to consider a range of future scenarios, and in today’s uncertain economic environment assessing the impact of that is not an easy task.”
Mr Hall has called for a grace period during which the new systems might be tested and embedded.