GovernanceAccountingBanks need clarity to assess credit losses

Banks need clarity to assess credit losses

With the introduction of the updated IFRS 9 rules, banks will need a clear strategy from governments to be able to quickly and accurately assess credit losses as coronavirus continues to wreak havoc with the economy

Banks must have “certainty and clarity” from governments to be able to properly assess credit losses in the wake of the coronavirus crisis, according to Marcus Morton, managing director, valuation services at Duff & Phelps.

“[We need] clarity on what it is the government is going to do,” says Morton. “The problem with asking for that from the government is they are themselves chasing a moving target because every day there’s new statistics out, new information out.

“The best thing would be some level of clarity on where they expect us to go, therefore what they’re going to put into place so that from the credit-modelling point of view, you can actually construct your credit scenarios correctly, with a reasonable degree of certainty on what’s going to happen. So that you can make the assessment of whether or not your default probability has significantly changed or not,” he says.

Morton also points out that the frequency of the UK government announcements has done little to help companies assess credit losses.

“If you keep changing what you are doing to the industry, so today, it’s going to be a bailout tomorrow, it’s going to be a loan guarantee, the next day it’s going to be to underwrite everyone’s wages. As long as the impact specific credits is changing, then you can’t nail down that analysis.”

Changes to IFRS 9 covers the amount of money banks must set aside to cover distressed loans. The Financial Times reported  that a number of banks had called for a delay to IFRS 9 because of the high amounts of capital required to cover these loans during the pandemic.

However, Morton was unsure that delay was a possibility, and while the guidance released by the Bank of England urges firms to take into account the government support being rolled out, it did not discuss a delay.

“IFRS 9 is already in place so I am not sure it can be delayed.  That said, the decision on the expected credit losses is meant to take into account any information about support from the government so clarity on what assistance will be available is necessary before the decision on any expected credit losses can be completed,” Morton says.

The question of delaying legislation also brings with it more problems than solutions for Morton.

“If you start delaying the implementation of legislation because it’s inconvenient to take it – I know inconvenience is a bit of a weak word, but what message does that send about the strength of regulation? And what does that say about the implementation of future regulations?

“It’s clear that IFRS 9 has the potential to report large credit losses. The question is, is that not really a reflection of what’s happening or are you actually not going to see a large number of credit losses and deterioration in credit, quality of assets, which needs to be reflected on banks and other things balance sheets?”

 

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