Financial institutions across the globe have been in a tizzy since new regulations were announced that banks would need to get a better grasp on their data. But one finance-focused data analytics firm is working to address banks’ concerns and help them get a grip on their implementation plans.
FICO is offering up some pearls of wisdom around the new rules published in the ninth edition of International Financial Reporting & Assurance Standards (IFRS 9). The data analytics firm aims to walk organizations through the final steps of the implementation process and ensure they meet the Nov. 1, 2017, deadline for Canadian institutions.
Originally released in July 2014, the new standards of IFRS 9 are an industry response to last decade’s financial crisis. Hensel says the International Accounting Standards Board (IASB) issued IFRS 9 to correct the overly optimistic accounting practices used in the 2000s, which partially caused the Great Recession of 2009.
The new IFRS 9 regulations mandate that banks report on bad loans they’ve issued and also predict which loans will turn sour down the line and track them on their financial statements. These increasingly complex predictions require financial institutions to get their data in line and substantially reform their approach to hedge accounting.
According to Daniel Hensel, principal consultant of financial services at FICO, the regulations pose a number of other challenges for organizations, including:
- Significant financial ramifications: The new standards require all accounts to reserve minimum 12 months’ expected loss against exposures and a lifetime expected loss for high-risk, deteriorated exposures.
- Need for deep technical knowledge: Implementation requires a deep understanding of both accounting concepts and credit risk modeling/management concepts.
- Intense hardware demands: The process is computationally intensive, yet still needs to be executed rigorous reporting deadlines in a highly controlled manner.
- Compatibility issues: Banks that have already invested heavily in Basel IRB compliance are looking for solutions that can integrate their existing analytics and systems with IFRS 9.
As a result of all these challenges, many financial institutions across Canada are clamouring to meet the Nov. 1, 2017, deadline as organizations struggle through the implementation process and work to understand the downstream impacts of the new accounting standards.
“We hope companies understand the most efficient and cost-effective path for meeting the deadline and, just as importantly, doing so with as little impact to profitability as possible,” Hensel says.
Hensel offers a few pieces of advice for banks facing these challenges, including:
- Examine key difference between these regulations and past, particularly the differences versus IAS 39 impairment
- Change the accounting mindset around expected losses versus incurred losses (as aforementioned, IFRS 9 requires banks to be much more forward-looking and make more complicated predictions).
- Create reserves against credit exposures rather than just drawn balances.
- Be prepared to make additional disclosures about expected credit losses and credit risks.