European Union banks that benefitted the most from IFRS 9 loan-loss relief also have the thinnest solvency ratios, European Banking Authority (EBA) data shows.
The temporary ability to add back to capital to offset provisions booked under the new framework has proved a boon to lenders in the bloc’s economic periphery. At Greece’s Piraeus, for example, such transitional adjustments made up 21% of the bank’s Common Equity Tier 1 (CET1) reserves at end-June, according to the EBA.
Those same lenders, however, also had the lowest CET1 capital ratios in the EBA’s sample once the add-backs were stripped out. At 8.8%, Piraeus’s ratio was the worst of the group – on par with Portugal’s Novo Banco, where add-backs made up 12% of capital, the fifth-highest proportion.
Conversely, banks such as Rabobank and ING, which made barely any use of transitional add-backs as of end-June – less than 0.1% of CET1 capital – were operating on robust fully loaded ratios of 17.2% and 15.7%, respectively.
There were outliers. At Romania’s Banca Transilvania, add-backs contributed 11.5%, well above the sample’s average, but the bank’s ratio would have been a solid 16.4% even on a fully loaded basis. A handful of global systemic lenders such as BNP Paribas, Deutsche Bank, Societe Generale and Santander, on the other hand, made minimal use of IFRS 9 recoups despite having razor-thin fully loaded ratios.
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 120 banks across 25 EU and European Economic Area (EEA) countries.
In June 2020, European policy-makers put together a ‘quick fix’ to the Capital Requirements Regulation to ease the burden of the Covid-19 crisis on the banking system.
IFRS 9 relief was part of the package, which allows lenders to ‘add back’ 100% of loan-loss provisions for ‘stage one’ and ‘stage two’ assets taken since January 1, 2020 into their regulatory capital. The temporary measures apply until end-2021.
This is in addition to pre-existing rules on capital requirements that allow banks to inject into their CET1 capital a set percentage of the higher loan-loss provisions they must 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
With the pick-up of IFRS 9 relief visibly concentrated among some thinly capitalised banks in weaker EU economies, the arrangement’s expiry risks entrenching the banking union’s north-south divide.
Across the EBA sample, banks that are both heavily reliant on transitional adjustments and most weakly capitalised are spread across Cyprus, Greece, Italy and Portugal – the bloc’s more economically troubled countries, which have been battered further by Covid.
Will pandemic-induced impairments roll-off these lenders’ books before relief arrangements are phased out? The trend at some banks bodes well. As a proportion of total CET1 capital, IFRS 9 add-backs at National Bank of Greece or Banca MPS are lower than they were nine or 12 months earlier, just after the first wave of infections in Europe. At Piraeus, they are noticeably more contained than at end-2019, despite the pandemic’s effect.
Still, reported numbers may not tell the full story. The EBA has recently chided some lenders for adjusting loan-loss parameters in the face of Covid vagaries in a way that produces lower IFRS 9 provisions. If regulators were to intervene in cases they deem egregious, some lenders may suddenly join the cohort of heavy transitional-arrangement users.
Get in touch
Like Risk Quantum? Sign up for free to our daily newsletter and check @RiskQuantum for the latest updates.
If you have any thoughts on our latest analysis or want to suggest other ways to present and analyse the data, you can email us.
Tell me more
EU systemic banks added €9bn to capital through IFRS 9 break
IFRS 9 relief added £8bn to UK banks’ capital buffers in 2020
Four in five EU banks quizzed on credit risks in 2020
Strange new world of Covid economics upends loan-loss models
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Risk Quantum
Consolidation of Arval exposures adds €20bn to BNP Paribas’ RWAs
Bank shifts exposures from soon-to-be retired equity IRB treatment to standardised approach
Russian loan liquidation lifts RBI’s risk density
Cash parked at sanctioned central bank carries higher capital requirements than original loans
CCPs’ skin in the game drops to historic low
Clearing members bear increasing load, analysis of 15 clearing houses shows
StanChart’s market RWAs hit eight-year high
Client-driven RWA deployment raises market risk exposure by $3.2 billion
Valley National sees surge in delinquent CRE loans in Q3
Bank’s net charge-off rate more than doubles as $114 million in CRE loans become past due
UBS logs three VAR breaches on legacy Credit Suisse positions
Bank risks higher capital charges amid market volatility and exit-related costs
HSBC’s China CRE provisions surge to cover one-fourth of book
Additional reserves and reduced exposure elevate ECL coverage for mainland portfolio
Breaking market norms, tri-party repo rates plunge for fringe collateral
Yields hierarchy upended as cost of repo-ing equities and other volatile securities falls over a percentage point below UST repos