The adoption of new international accounting standards is expected to increase provisions for credit losses at European banks, and cut into their capital positions, according to a report published by European banking regulators on Thursday.
The European Banking Authority (EBA) report aims to assess the impact of a new accounting standard known as IFRS 9, which finds that the biggest bottom line impact will be on banks’ impairment requirements.
The report estimates that banks will have to increase provisions for credit losses by an average 18% as a result of the new standard, and most banks will see provisions increase by as much as 30% from current levels.
Additionally, common equity tier 1 (CET1) capital ratios are expected to decrease by up to 59 basis points (bps) on average, and, for most banks, the impact will be up to 75 bps. In a limited number of cases the impact of IFRS 9 could be higher, the report notes.
Among other things, IFRS 9 introduces a new impairment model based on expected credit losses, and introduces new requirements and guidance on the classification and measurement of financial assets.
The EBA will “closely monitor” the implementation of the new standard, which is slated to be adopted by Jan. 1, 2018, and it calls on banks to “continue their efforts towards a high quality implementation”.
Also on Thursday, the European Securities and Markets Authority (ESMA) published a statement setting out issues to be considered when implementing new standard, and highlighting the need for “consistent, high-quality implementation”, and for transparency on its impact to users of financial statements.
“The new standard is expected to have significant impacts on financial institutions and potentially non-financial entities which can benefit from the changes made to the hedge accounting requirements,” the ESMA says.