The EBA’s monitoring of IFRS 9 implementation by EU institutions confirms need to timely address practices misaligned with expectations

EBA has issued its second report on the implementation of the IFRS 9 by EU institutions, particularly focusing on HDPs. The report acknowledges the significant progress made by institutions in implementing ECL impairment models, which facilitate timelier recognition of loss provisions. However, it also underscores persistent concerns and some divergence from EBA’s expectations regarding the implementation of IFRS 9.
One key area of concern highlighted in the report is the continued absence of a collective assessment of SICR despite ongoing macroeconomic uncertainties. The use of the IFRS 9 low credit risk exemption is noted as a source of delay in transfers to Stage 2, prompting EBA to urge institutions to review their approaches in line with regulatory and supervisory expectations.
The report emphasizes the integral role of overlays in the ECL framework, allowing institutions to account for risk factors not adequately captured by models. However, it points out variations in the application and calibration of overlays, necessitating a structured approach and robust governance frameworks.
Backtesting methodologies for ECL models are scrutinized, revealing disparities in scope and analysis among institutions. EBA expresses concern about the lack of proper follow-up actions on backtesting results, particularly when indicating underperformances.
Variability in PD estimates across institutions prompts heightened supervisory scrutiny. The report notes that IFRS 9 PDs are generally higher than observed default rates, reflecting the forward-looking nature of accounting estimates.
Incorporation of forward-looking information is generally observed to have a limited impact on ECL figures. However, divergent practices and smoothening techniques are identified as potential hindrances to accurately reflecting the point-in-time and forward-looking nature of IFRS 9 figures.