Bank of England advice on liquidity reporting under IFRS 9

The Bank of England and Prudential Regulation Authority (PRA) has issued initial guidance on reporting expected credit loss (ECL) estimates under IFRS 9 Financial Instruments in wake of covid-19

The measures are aimed at alleviating operational burdens on PRA-regulated firms and Bank regulated financial market infrastructures (FMIs) in the wake of the covid-19 outbreak so they are able to deliver the critical functions they provide to the economy.

The Bank and the PRA recognise the importance of IFRS 9 as a forward-looking measure of losses, which was not considered in IAS 39 Financial Instruments: Recognition and Measurement, but also recognises the very high levels of uncertainty around how covid-19 will impact the economy. 

Under the Capital Requirements Directive, the PRA can consider whether firms’ provisioning under applicable accounting standards is flowing through into its regulatory capital position in an appropriate way. 

The PRA has told firms that forward-looking information used to incorporate the impact of covid-19 on borrowers into the expected credit loss (ECL) estimate needs to be both reasonable and supportable for the purposes of IFRS 9. 

Given the sudden onset of the virus, the PRA believes that there is very little such information available as yet, and regards the preparation of reliable and detailed forecasts as very challenging currently.  

In the event firms believe such forecasts can be made, the PRA expects firms to reflect the temporary nature of the shock, and fully take into account the significant economic support measures already announced by global fiscal and monetary authorities. 

In particular, any such forecasts should take into account the relief measures – such as repayment holidays – that will be made available to enable borrowers who are affected by the covid-19 outbreak to resume regular payments. 

In a statement the Bank said: ‘Our expectation is that eligibility for HMG’s policy on the extension of mortgage repayment holidays should not automatically, other things being equal, be a sufficient condition to move participating borrowers into Stage 2 ECL.'

Tim Cant, regulation partner at law firm Ashurst, said: ‘The UK regulators are trying to do all they can, reducing capital requirements and postponing stress tests but it is likely more flexibility is required on supervisory capital assessments.

‘BaFIN [German regulator] has indicated that it will show material flexibility in its assessment of credit and market risk. The same approach may be needed in the UK.’

The Bank said it will continue to keep this under review, including through discussion with relevant accounting regulators and standard setters both in the UK and globally, and expects to provide further guidance to firms next week, with a view to assisting firms to adopt consistent approaches in the face of the prevailing uncertainty.

It has also cancelled the Bank’s 2020 annual stress test – the annual cyclical scenario (ACS) test for the eight major UK banks and building societies to help lenders focus on meeting the needs of UK households and businesses via the continuing provision of credit.  

The recent 2019 stress test showed that the UK banking system was resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis, combined with large falls in asset prices and a separate stress of misconduct costs.

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