Shearman & Sterling LLP | FinReg | Basel Committee on Banking Supervision Consults on Regulatory Treatment of Accounting Provisions 
Financial Regulatory Developments Focus
This links to the home page
Financial Regulatory Developments Focus
FILTERS
  • Basel Committee on Banking Supervision Consults on Regulatory Treatment of Accounting Provisions 

    10/11/2016
    The Basel Committee on Banking Supervision published a consultation paper and discussion paper on the regulatory treatment of accounting provisions under the Basel III capital framework and related policy considerations. The International Accounting Standards Board and the US Financial Accounting Standards Board have adopted new provisioning standards that require the use of expected credit loss models rather than incurred loss models - the International Financial Reporting Standard (IFRS) 9 and the Current Expected Credit Losses (CECL), respectively. These standards modify provisioning standards to incorporate forward-looking assessments in the estimation of credit loss. The new IASB Standards will apply from January 1, 2018, although earlier application is permitted. The new FASB Standards will apply from January 1, 2020 for certain banks that are public companies and from 2020 for all other banks, although early application by all banks is permitted from 2019. The Basel Committee is considering the implications of new ECL models for regulatory capital because the new models will result in fundamental changes to the provisioning practices of banks. The consultation paper sets out the current regulatory treatment of provisions as well as the Basel Committee’s proposal to retain, for an interim period, the current regulatory treatment of provisions under the standardized and the internal ratings-based approaches. In particular, the Committee is proposing that, in the interim period, jurisdictions would extend their existing approaches to categorizing provisions as general provisions (GP) and specific provisions (SP) to provisions measured under the applicable ECL accounting model.

    The Basel Committee is also seeking feedback on whether any transitional arrangements are required to assist banks in adjusting to the new expected credit loss provisions. The consultation paper sets out three possible models and feedback is requested on the design of a transitional arrangement, including on what the appropriate reference metric should be (the consultation paper suggests CET1 capital expressed as a “money amount”) and the appropriate length of a transitional period (the consultation paper suggests three to five years). The discussion paper outlines policy options for the long-term regulatory treatment of such provisions. The options under consideration are: (i) retaining the current regulatory treatment of provisions, including the distinction between GP and SP; (ii) retaining the distinction between GP and SP for regulatory purposes based on definitions that would produce universally aligned categorizations of ECL provisions as GP or SP across jurisdictions; (iii) introducing a standardized regulatory EL component to the standardized approach for credit risk; and (iv) other alternatives proposed in response to the consultation. Responses to both papers are due by January 13, 2017.

    View the consultation paper.

    View the discussion paper.