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By Huw Jones
LONDON, March 17 (Reuters) - An accounting rule introduced
after the global financial crisis faces its first big test as
banks seek relief in the face of government calls to keep
coronavirus-hit borrowers afloat.
Since 2018 banks must partly provision for a loan upfront in
expectation of losses in its first year. Under the old rule,
there was no effective provisioning until there were very late
repayments or even default that incurred actual losses.
The rule is the accounting sector's core response to the
global financial crisis to avoid banks having to be rescued by
taxpayers when loans turn bad en masse in a downturn like the
one Britain and other countries now face
Known as IFRS9, it is mandatory in over 100 countries,
including the European Union and Britain, but not in the United
States, where there is a tougher version with full upfront
provisioning for expected losses.
"Obviously IFRS 9 is an issue for us and all banks in terms
of how we recognise any provision," Alison Rose, chief executive
of the Royal Bank of Scotland, said on Tuesday.
"I think it’s too early to say how that will evolve," she
told a banking conference.
Reuters reported last week that banks were pressing British
policymakers for the rule to be eased.
Upfront provisioning is considered an expense and therefore
cuts into profits and core capital.
The Bank of England's Prudential Regulation Authority (PRA)
sets capital requirements and its transitional relief for banks
implementing IFRS 9 is now winding down.
The BoE's Financial Policy Committee, which has powers to
order regulators to take action, meets on Thursday with a
statement due on March 24.
The BoE had no comment ahead of the meeting.
After the industry requests, the Bank is expected to be
alert to the accounting issue and in discussion with the banks.
"If they were minded, the PRA could go back up to a higher
level of transitional relief," said Philippa Kelly, head of
financial services at the ICAEW, a professional accounting body.
The government may also need to give some guidance that a
loan to a company that is now facing temporary difficulties due
to coronavirus does not require more provisioning.
IFRS 9 has faced criticism in Europe that it would be
"pro-cyclical" or accentuate crises by forcing lenders to
provision more in a crisis when capital is already being
depleted.
"This will be the first crisis to test the standard in terms
of procyclicality and how investors can engage with it," Kelly
said.
Euro zone finance ministers said on Monday they welcomed
last week's statements from regulators that they will be
"flexible" in applying capital rules on banks, and alluded to
the accounting rule.
"Such flexibility is needed to avoid, as much as possible,
pro-cyclical, unintended consequences for the financial sector,"
the Eurogroup said.
(Reporting by Huw Jones; Additional reporting by Iain Withers;
Editing by Kirsten Donovan)
