EBA releases report on IFRS 9 monitoring

The European Banking Authority (EBA) published a report summarising the findings arising from the monitoring activities on the International Financial Reporting Standard (IFRS 9) implementation by EU institutions. The aim of this report is to assist supervisors evaluate the quality and adequacy of IFRS 9 Expected Credit Loss (ECL) models, to contribute to a high-quality and consistent application of the IFRS 9 standard in the EU.

EU institutions have made significant efforts to implement and adapt their systems to the IFRS 9 requirements since its first application date. However, the level of judgement embedded in the standard leaves open the possibility to use a wide variety of practices. While no single practice turned out to be a strong driver of the ultimate levels of provisioning, some observed practices would deserve further scrutiny from supervisors.

This is particularly relevant as regards the approaches implemented on the Significant Increase in Credit Risk (SICR) assessment, where there is a very limited use of the notion of collective assessment for borrowers with common characteristics, which is unexpected in the context of an environment of high economic uncertainty, such as the COVID-19 crisis.

With specific reference to ECL parameters and model inputs, the IFRS 9 12 month PD estimates and variability generally increased during the pandemic, due to the incorporation of forward looking information (FLI) and their point in time nature.