The EBA focuses on the design of the transitional arrangements, to allow financial institutions to adopt the new standard without a serious negative impact from day one.

In particular, the EBA is of the view that no neutralisation of the initial impact of IFRS 9 should be allowed during the phase-in regime, starting as of 1 January 2018 and supports a ‘static' approach for amortising over four years the one-off impact of IFRS 9. Institutions, if they wish, may opt to recognise the full impact of IFRS 9 as of day one.

The opinion states: ‘Overall, a dynamic approach would add more complexity to the already complicated process of explaining the new IFRS 9 concepts and their impact on CET1 to stakeholders. Taking into consideration that both approaches have limitations, the EBA believes that a static approach achieves a better balance between addressing the rationale of the transitional arrangements and at the same time being a prudent (as it avoids adding back IAS 39 provisions) and simple approach that can be applied by institutions and understood by stakeholders.’

In addition, the EBA believes that all IFRS 9 provisions should be considered as specific credit risk adjustments in the context of the current EBA regulatory technical standards (RTS) on credit risk adjustments, notwithstanding the fact that amendments or clarifications to the RTS may be needed in the future.

Under IAS 39, institutions recognise losses for impaired assets (which most likely would be close to stage 3 under IFRS 9) and also set aside provisions for incurred but not reported losses (IBNR). This means that some of the amount of stage 1 and stage 2 provisions is already recognised under IAS 39. Therefore, if the total amount of stage 1 and stage 2 provisions is neutralised, this will result in a positive adjustment in CET1 due to the application of IFRS 9 (as a result of the impairment requirements).

The EBA says the references to IFRS 9 in the Commission’s proposal as it currently stands could be interpreted as allowing institutions to add back ECL in stage 3 under IFRS 9 (which are deemed similar to the current IAS 39 provisions) and therefore, it would result in the neutralisation of the existing IAS 39 incurred loss provisions.

The Commission’s proposal does not consider that for institutions using the IRB approach to measure credit risk there may be an excess or shortfall of accounting ECL in comparison with regulatory expected losses. For instance, if an institution were in a shortfall situation under IAS 39 and as a result of IFRS 9 was still in shortfall (despite an increase in provisions under IFRS 9), there would be no impact on CET1 due to the application of the impairment requirements of IFRS 9. However, if an institution decided to apply the transitional arrangements, it would be able to add provisions back to CET1 and therefore have a positive impact due to IFRS 9.

The EBA says that in order to address these issues, greater clarity is needed in the Commission’s current proposal, as are legal provisions on how to avoid increases in own funds due to adding back the impact of provisions that would otherwise exist under IAS 39, but without requiring institutions to calculate IAS 39 provisions during the transitional period, as this would be operationally burdensome.

The EBA recently launched a second exercise focusing on the impact of IFRS 9 on regulatory own funds, its interaction with prudential requirements and the progress made by institutions in its implementation. The results of this assessment exercise will be published in Q2 2017.

The EBA sent the opinion to the European Commission, parliament and Council and to all competent authorities across the EU, 

Opinion of the European Banking Authority on transitional arrangements and credit risk adjustments due to the introduction of IFRS is here.