Update on guidance from the PRA and the ECB
Tony Clifford, Ernst & Young LLP, and Michiel van der Lof, Ernst & Young Netherlands
Tony explained the background of the task force on Disclosures for ECL (referred to as DECL), which is an initiative sponsored by the PRA, the FCA and the Financial Reporting Council (FRC). This task force involves banks and a variety of stakeholders and builds on the work of the EDTF. Phase one of the initiative is to produce a document outlining the principles of best practice with respect to ECL disclosures. Phase two of the initiative will be to agree on disclosures that enhance comparability.
Tony emphasised that the proposed disclosures by the task force are not for the purposes of IFRS 9 transition but are intended to be applicable on an ongoing basis. The recommended disclosures are designed for the seven largest UK banks but will also provide ‘best practice’ for smaller institutions. The expectation of the task force is for the seven banks to incorporate the disclosures in their 2018 accounts on a ‘best endeavours’ basis. The recommendations are not necessarily required to be included in the audited financial statements and may, alternatively, be included elsewhere in the annual report. Inclusion with the Pillar 3 disclosures may also be acceptable.
Tony remarked that the European regulators will be watching carefully and may follow suit with respect to similar disclosure initiatives.
Tony went on to outline some of the key recommendations of DECL phase one:
1. Qualitative disclosure required of:
- How IFRS 9 (including staging) relates to actual risk management
- How multiple macroeconomic scenarios are selected and weighted
- Key parameters of the central scenario
2. At an appropriate granularity, quantitative disclosure of:
- The staging criteria and their individual effects
- Key ECL parameters
- Post-model overlays and why they are necessary
- The effect if they had only used a central scenario and how this has changed from the previous period and why this is the case
- ECL coverage by risk ratings and stages
- The amount of stage 3 exposures in a cure period
- Sensitivities of the outcome of the ECL model to key parameters
Moving on to the EU regulatory landscape, Michiel discussed the latest updates and current topics under discussion at the ECB.
Click to hear from Michiel