IFRS 9 transitional measures saved EU banks €22bn

Four Greek banks claim €1.2 billion of capital relief on average

Rules granting relief from the capital-sapping effects of accounting standard IFRS 9 saved European Union banks €22 billion ($24 billion) of Common Equity Tier 1 capital (CET1) as of end-June, with Greek banks reaping the most benefits on average.

Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank – the four Greek banks included in the EU-wide transparency exercise – claimed a combined €4.9 billion of IFRS 9 transitional relief, about €1.2 billion each on average. Their combined CET1 capital would have been 18.2% lower without the measures.

The 11 Italian banks in the EU sample claimed an aggregate €8.4 billion of relief, or €765.7 million each on average. Their combined CET1 capital would have been 5.9% lower without the relief.

 

UK banks, of which there were six in the sample, took €507.5 billion of IFRS 9 transitional relief on average. The difference between adjusted and unadjusted CET1 in aggregate for these firms was 1.1%.

Of the 131 individual banks in the sample, 45 used the transitional measures to adjust their CET1. National Bank of Greece posted the greatest percentage-wise difference in adjusted and unadjusted CET1, of –23.9%, followed by fellow Greek lender Piraeus Bank with –21.9% and Bulgarian firm First Investment Bank with –20.3%.

 

What is it?

The EU-wide transparency exercise discloses bank-by-bank data on capital positions, risk-weighted assets, leverage exposures and asset quality for 131 banks across 27 EU and European Economic Area (EEA) countries.

IFRS 9 came into effect on January 1, 2018. It ushered in a new framework for the measurement of asset impairment based on expected credit losses, replacing the incurred loss model under IAS 39. 

European rules on capital requirements allow banks to inject into their CET1 capital a set percentage of the higher loan-loss provisions they have to hold under the new accounting regime. These arrangements phase out over a five-year period, starting at 95% of ‘IFRS 9-related’ provisions in 2018, falling to 85% in 2019, 70% in 2020, 50% in 2021 and 25% in 2022.

Why it matters

Without the soothing effects of the IFRS 9 transitional measures, a handful of EU banks would have posted CET1 capital ratios perilously close to regulatory minimums. For example, National Bank of Greece disclosed a transitional CET1 capital ratio of 14.8% as of end-June, but this would have been 11.4% without the IFRS 9 relief. Its minimum requirement is 9.375%.

Such banks are in a race against time to build up capital and rid themselves of the risky loans attracting supersized loan-loss provisions before the transitional period ends.  

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