New accounting rule for virus-hit banks faces first big test

By Huw Jones

By Huw Jones

LONDON, March 17 (Reuters) - An accounting rule introduced after the global financial crisis faces its first big test as banks seek relief in the face of government calls to keep coronavirus-hit borrowers afloat.

Since 2018 banks must partly provision for a loan upfront in expectation of losses in its first year. Under the old rule, there was no effective provisioning until there were very late repayments or even default that incurred actual losses.

The rule is the accounting sector's core response to the global financial crisis to avoid banks having to be rescued by taxpayers when loans turn bad en masse in a downturn like the one Britain and other countries now face

Known as IFRS9, it is mandatory in over 100 countries, including the European Union and Britain, but not in the United States, where there is a tougher version with full upfront provisioning for expected losses.

"Obviously IFRS 9 is an issue for us and all banks in terms of how we recognise any provision," Alison Rose, chief executive of the Royal Bank of Scotland, said on Tuesday.

"I think it’s too early to say how that will evolve," she told a banking conference.

Reuters reported last week that banks were pressing British policymakers for the rule to be eased.

Upfront provisioning is considered an expense and therefore cuts into profits and core capital.

The Bank of England's Prudential Regulation Authority (PRA) sets capital requirements and its transitional relief for banks implementing IFRS 9 is now winding down.

The BoE's Financial Policy Committee, which has powers to order regulators to take action, meets on Thursday with a statement due on March 24.

The BoE had no comment ahead of the meeting.

After the industry requests, the Bank is expected to be alert to the accounting issue and in discussion with the banks.

"If they were minded, the PRA could go back up to a higher level of transitional relief," said Philippa Kelly, head of financial services at the ICAEW, a professional accounting body.

The government may also need to give some guidance that a loan to a company that is now facing temporary difficulties due to coronavirus does not require more provisioning.

IFRS 9 has faced criticism in Europe that it would be "pro-cyclical" or accentuate crises by forcing lenders to provision more in a crisis when capital is already being depleted.

"This will be the first crisis to test the standard in terms of procyclicality and how investors can engage with it," Kelly said.

Euro zone finance ministers said on Monday they welcomed last week's statements from regulators that they will be "flexible" in applying capital rules on banks, and alluded to the accounting rule.

"Such flexibility is needed to avoid, as much as possible, pro-cyclical, unintended consequences for the financial sector," the Eurogroup said. (Reporting by Huw Jones; Additional reporting by Iain Withers; Editing by Kirsten Donovan)