The PRA says it has a particular interest in the interaction of expected credit loss (ECL) with regulatory capital; the implications of ECL for credit risk management practices; and transparency and disclosure.

The note outlines four questions which the PRA believes non executive directors should be asking the board of a bank or other financial institution moving to IFRS 9. The first concerns the approach to transitional arrangements.

The PRA points out that European legislative bodies are examining the case for transitional arrangements to be applied to the impact of IFRS 9 ECL accounting on credit institutions’ regulatory capital. Firms planning to use transitional arrangements need to inform the PRA of that decision. Provided that the final capital requirements regulation (CRR) amendment establishes transitional arrangements broadly similar to those currently being considered, the PRA encourages UK firms to use them from the first day of IFRS 9 application (1 January 2018 for December year-end firms).

Secondly, the PRA says non executive directors should satisfy themselves their board understand the impact of the new provisioning for ECL and how it affects different types of lending and overall capital planning – both in business-as-usual and stressed conditions. The firm should be appropriately resourced to incorporate IFRS 9 into its stress testing and capital planning in 2018.

The third issue concerns whether a firm’s governance has been upgraded sufficiently to cope with the higher volume of forward-looking credit risk data. Non executive directors are tasked with evaluating the ability to source and manage risk data and the adequacy of IT.

Finally, the PRA says non executive directors should make sure disclosures enable investors and other users of financial data to transition effectively to IFRS 9. It says disclosures on the move from IAS 39 to IFRS 9 and for IFRS 9 going forward need to be timely, complete, correctly focused and as harmonised as possible, so that users can navigate from firm to firm.

The PRA will be reviewing firms’ credit risk assessment and how they measure ECL. A priority for 2018, and beyond, will be to identify and replace tactical solutions adopted to implement ECL on time where they may be unduly approximate, or might not hold in less benign conditions.

The note concludes: ‘We consider 2018 to be merely the end of the beginning. Firms are expected to continue to work on their ECL methodologies for some years to come. We’ll continue working with firms, auditors and global accounting and auditing standards setters to identify any guidance needed for an orderly, prudent and consistent approach to implementation.’

Getting ready for IFRS 9 – a note for non-executive directors is here.

Report by Pat Sweet