Supervisory update

Nic van der Ende, Chairman of the EBA’s accounting subgroup and DeNederlandscheBank (DNB) senior policy advisor

Nic delivered a challenging presentation in which he expressed his views on current supervisory topics. While he was clear that the views are his own and do not necessarily represent views of the EBA, his presentation highlighted several important risk areas for participants to consider.

Speaking on banks’ ECL disclosures in 2018, Nic echoed the views of previous speakers in stating that the disclosures need to be improved in future financial statements to allow for greater consistency and comparability. He was concerned about the lack of consistent application of policy implementations across the industry, stressing, as an example, the divergence in banks’ write-off definitions. He also singled out the lack of ECL sensitivity analyses to key forward looking information as a significant improvement point.

While the level of disclosures in 2018 was in line with Nic’s expectations, he was clear that this should not be seen as a final product and urged participants to plan to improve their disclosures in 2019. Nic mentioned his concern that, because IFRS 9 has been implemented in a relatively benign market, banks’ models and systems may not have been designed with the appropriate level of refinement required for more challenging environments.

The EBA’s 2019 focus areas include monitoring IFRS 9 implementation and its interaction with prudential requirements. Another key project is the IFRS 9 benchmarking report. Nic indicated that he expects the population of banks that will be asked to participate to be similar to the population which participated in the previous exercise. The exercise is likely to start in 2019 and be published early in 2020. Nic briefly mentioned the EBA’s approach to other accounting standard-setting projects, such as the IBOR reform ED and the dynamic risk management projects, but indicated that its focus is likely to be on monitoring the implementation of IFRS 9 rather than on commenting on these new pronouncements.

Nic briefly reminded participants of the new guidance in revised capital requirements regime (CRR2), in particular the details in article 500 for bulk disposals of non-performing loans and article 47 for the prudential loss coverage backstop.

He also indicated that the EBA is working on guidance on the treatment of software to define which eligible software would no longer be deducted from Tier 1 capital.

Finally, Nic touched on the important topic of sustainable finance, mentioning that climate change is likely to pose serious challenges to the prudential framework. While the EBA does not yet have an active project on climate change, Nic urged banks to consider climate change risks when calculating ECLs. It remains to be seen whether regulatory relief is a possibility for banks which are pro-active in responding to climate change risks.

For further information on the regulatory outlook for banks, refer to the following EY publications: