Assessing IFRS 9 implementation

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IFRS 9 was always going to provide implementation challenges for banks. Besides the purely technical issues, there has been significant scrutiny from a very early stage involving regulators, investors and rating agencies, supervisory boards, and both external and internal auditors. However, it is not all bad: addressing the implementation challenges can also open a number of opportunities for banks to improve various processes. The prudent are seeing it as an opportunity, not a threat.

Implementing IFRS 9

IFRS 9 forces banks to improve their data governance framework. They also need to be able to manage a broader range of models, not least because the level of model sophistication is continuously increasing. This means that managing the whole calculation process is getting more and more complex, which requires a stronger internal control framework to manage these challenges.

Assessing IFRS 9 implementation

The impact on loan provision has been less than expected, and some good practices around stress testing are starting to emerge.

EY’s fourth annual IFRS 9 Impairment Banking Survey suggests that few, if any, banks ‘hit the ground running’ on 1st January this year, when IFRS 9 came into force. The size of the change required was generally underestimated and change programs have taken longer than planned — though possibly not more than might have been expected. On the plus side, the impact on loan provision has been less than expected, and some good practices around stress testing are starting to emerge. There is no question that the impact of introducing IFRS 9 is long-lasting.

One of the major changes has been the role of the Chief Risk Officer (CRO) over the last year or more. In many banks, the size of the team has increased, and some have also had to make significant organisational changes, specifically to manage the new compliance structure. Broadly speaking, this has resulted in the CRO’s department moving closer to the finance department, from both an organisational and an IT point of view. Banks need a much more stable framework or architecture for IFRS 9, but this still needs to be flexible enough to deal with future process changes such as those that may be required to capture increased credit risk or deploy workflows.

The role of auditors

The way in which banks deal with their auditors has evolved since the start of IFRS 9. So, what are the lessons learned? Auditors often deal with large numbers of banks, this may well be seen as a source of considerable information and experience, but does that help? Well, perhaps, but it is also true that each bank’s situation is unique. There is no ‘one size fits all’ approach, but there is room for learning from others’ experience, and the dialogue is needed.

Ideally, auditors would have been included in IFRS 9 implementation projects from the very beginning, so that they could learn alongside their clients. This, however, leads to questions about how much back-testing and sensitivity analysis is really necessary for IFRS 9 compliance? In the end, it is possible to overthink the process.

Global best practices show that there is a trend to incorporate learning into ongoing projects. In other words, everything does not have to change overnight, and that there is a learning curve for everybody. This is true for both organisational and methodological approaches, as well as the technical environment. It is often only possible to tell if something works by trying it, and then adapting if necessary. Banks are therefore reliant on their experience to calibrate the various models and reduce volatility, working to absorb market volatility and present a more stable and resilient view of the institution.

#IFRS9 was always going to provide implementation challenges for banks. @Thorsten_Hein has taken the pulse on the ‘state of play’ for IFRS implementation. #banking #datagovernance #risk Click To Tweet

A word on models

Notwithstanding all the organisational and IT-related changes, banks also need to consider the impact of their models, used to support regulatory stress testing and capital planning, for example. Each bank’s situation is individual, and external models should therefore only be used on a temporary basis, to speed up the implementation of models or to find ways to overcome particular data gaps. The individual profile of a bank can never be fully described by an external model, so some adaptation will always be necessary.

Ultimately, IFRS 9 implementation shows some broad patterns and trends. There is, however, no question that every bank is different. Regulators, auditors and banks alike need to maintain the focus on the particular situation and not be drawn into unhelpful comparisons.

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Thorsten Hein

Principal Industry Consultant

As Principal Industry Consultant in the Risk Research and Quantitative Solutions Division at SAS Institute, Thorsten Hein specialises in global risk management operations insights both in banking and insurance, focusing on Risk and Finance Integration, IFRS and Stress Testing. He helps risk management stakeholders to go beyond pure regulatory compliance and drive value-based management to maximise business performance. By applying experience from more than 20 years in Business Intelligence and Analytics, and supporting Financial Services and Risk Management, he ensures business relevance as well as technical coherence. Thorsten Hein joined SAS Institute already in 2004. Previously, he has been working for more than ten years for renowned providers of business intelligence solutions. Having started his career at the headquarters of Allianz Insurance in Germany, from the very beginning his main focus was assisting companies in the financial services industry in improving their processes and systems.

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