Greek, Italian lenders receive capital boost from EU IFRS 9

first_imgThe release of the data followed the announcement last month by the European Commission of measures to relieve the regulatory and capital burden on Europe’s lenders during the coronavirus pandemic.In particular, the Commission urged lenders to adopt the IFRS 9 transitional measures it first proposed back in 2018 to phase in the move from the International Accounting Standards Board’s legacy impairment model under International Accounting Standard 39 to International Financial Reporting Standard 9.The transitional arrangement allows banks to add back in IFRS 9-related additional impairment allowances over a gradually reducing five-year timeframe, starting with 95% in 2018 and reducing to 25% in 2022.IFRS 9, which the EU adopted with effect from 1 January 2018, sets out to address the concern that the backward-looking IAS 39 incurred-loss impairment model meant banks were too slow to book losses during the 2008 Financial Crisis.The standard instead requires lenders to book an upfront impairment allowance when it takes a financial asset on to its books.This allowance is an estimate of the anticipated full life-time losses that the bank expects to materialise over a 12-month time horizon.The transparency exercise, in contrast to a stress test, presents a snapshot of the capital position, assets and liabilities, and leverage of some 127 banks across the EU and EEA at the relevant reference dates.Meanwhile, the data also revealed that the French and UK banks in the sample lead their peers in terms of trading book volumes.The total trading assets of French banks in the survey came in at €1.4trn with UK banks following with €1.2trn.The percentage portfolio holdings are potentially significant because trading book assets are generally accounted for at fair value under IFRS 9.IFRS 13, which determines the process for measuring assets at fair value, features a three-level hierarchy.Assets reported under Level 1 of that framework rely on quoted market prices. Assets under Levels 2 and 3, however, are priced according to modelled outputs.The majority of the assets classified to fair value by French and UK banks are in Level 2.Critics of this approach say that Levels 2 and 3 concentrate risk in times of a sudden shock to the financial system because such assets are in danger of becoming highly illiquid.However, in February of this year, the European Systemic Risk Board issued a report in which it noted that EU banks held fair value assets worth some €7.3trn on their balance sheets in December 2018.Of this total, some €2.4trn were accounted for at Level 1 under the fair value hierarchy, €4.6trn were in Level 2 and €300bn in Level 3.The ESRB said this represented a “sizeable decline in the total value of financial instruments measured at fair value” compared with the position at the end of 2016 and noted that it was “driven by a decline in derivative positions”.To read the digital edition of IPE’s latest magazine click here. Greek and Italian banks made the greatest use of the European Union’s transitional relief aimed at relieving the burden on the bloc’s banks of the move to a more burdensome forward-looking loan-loss accounting model.Transparency data released by the European Banking Authority (EBA) covering 30 September and December 2019 revealed that the four Greek lenders in the survey boosted their total capital by some €4.8bn.The same survey data also revealed that 11 Italian banks increased their total capital position by €6.4bn.EBA chair Jose Manuel Campa said: “The EBA considers that the provision to market participants of continuous information on banks’ exposures and asset quality is crucial, particularly in moments of increased uncertainty.”last_img

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