The industry generally believes that IFRS9 will put higher requirements on the risk preparation of commercial banks and push up operating costs.
Author: Chen Jie, Shanghai Bank Information Technology Department; Zhou Lin , Shanghai Bank Operations and Management Department; Li Haiyan, Shenzhou Digital Rongxin Software Co., Ltd.
Source: Central Bank Observation
IFRS9 is the No. 9 financial instrument of international financial statements issued by the International Accounting Standards Board. The improved IFRS9 introduces a set of more logical classification and measurement methods, a single, forward-looking "expected loss" impairment model, and a set of hedging accounting treatment methods that have undergone substantial changes. generally believes that IFRS9 will put higher requirements on commercial banks’ risk preparation and push up operating costs.
Implementation of IFRS9 new financial instrument standards is not just an accounting level work, but will have a significant impact from the entry of front-end transactions to the disclosure of back-end accounting and financial report. requires banks to transform their business transaction processing systems, add classification judgment functions, and update the accounting system of relevant accounting systems to meet the implementation requirements of the new financial instrument standards. The impact of
IFRS9 on the IT system of commercial banks is reflected in the three aspects of classification, valuation and impairment.
First of all, it is the classification. 's impact on IT is reflected in transaction processing systems, intra-bank statistical analysis reports and regulatory reporting. Generally speaking, the transaction processing systems involved include core systems, bill systems, financial management systems, credit management, credit card systems, interbank systems, financial markets, as well as trade financing and international settlement systems. There are three main changes in the financial instrument standards: First, financial assets are divided into three categories according to business model and contract cash flow characteristics, and are no longer divided into four categories according to the purpose of holding; Second, financial assets use the expected loss model to replace the current loss model; Third, restrictions on the application conditions, continuous use and termination of the use of hedging accounting have been relaxed. The difficulty of transforming the
IT system is: how can we label related "three categories" according to the requirements of the new financial instrument standards at the beginning of the business? After all, making "expected judgments" on business conditions that have not yet occurred is a great challenge to the business department to put forward IT system transformation needs. Because it involves a series of subsequent accounting, valuation and impairment processing, it is obvious that it cannot simply solve the professional operation requirements of the "three categories" through teller entry. There are two possible solutions:
One is to use parameterized design to create a "three-category" model through richer transaction-related information, which is automatically set by the system, rather than manually selecting the "three-category" logo. But this solution requires more transaction information and more mature modeling practices to be realized.
2 is a system architecture separated by the front and back office. In the relevant transaction process, professional financial managers provide a "three-category" operation interface, and professionally trained financial personnel choose the "three-category" logo. But this solution will undoubtedly bring new problems to massive online transactions.
Given that "business model" and "contract cash flow " are the logical basis for IFRS9 to classify financial assets, we need to conduct a more detailed analysis of them. The so-called business model refers to how banks manage financial assets to generate cash flow - collect contract cash flow, sell financial assets, or both. When judging the business model of a bank managing financial assets, two aspects should be paid attention to: First, the judgment of the business model is generally neither aimed at individual financial instruments nor at the reporting subject level, but at the portfolio level; Second, the business model cannot be judged based solely on the statements or intentions of the management authorities, but should pay attention to facts, such as business plans, the compensation methods of managers, the frequency and amount of sales activities (including historical information and expected data), etc., all relevant objective information should be considered.
Information on the sale of financial assets can provide evidence on how the reporting entity realizes cash flow, but the sale information alone is not enough to judge the business model.It is not possible to exclude the financial assets from the amortized cost category just because the reporting entity sells the financial assets. For example, if the sale is very low or the amount is not significant, or if the sale is caused by the deterioration of the credit quality of financial assets, the business model can still be considered to be the collection of contract cash flow. In contrast, a business model that collects contract cash flow and sales involves higher sales frequency and quantity. For example, in order to maintain a specific interest rate level or to match the duration of financial liabilities and the financial assets it supports, the reporting entity will adopt a business model that collects contract cash flow and sells both. Adhering to the concept of business model, the reclassification of financial assets in IFRS9 has also been greatly simplified. Financial assets can only be reclassified when the business model of managing financial assets changes. Another criterion for
financial asset classification is to see whether the "contract cash flow" is only principal and interest (SPPI). Only financial assets with SPPI cash flow characteristics can become financial assets measured at amortized cost or financial assets measured at fair value and whose changes enter other comprehensive income.
IFRS9 clearly states that interest not only includes the time value of money and credit risk reward , but also includes liquidity risk reward, expense compensation and profit. The interest rate can be a fixed interest rate or a floating interest rate (such as LIBOR+3%), but it cannot be a reverse floating interest rate (such as 10%-LIBOR). The reverse floating interest rate does not meet the interest definition. It should always be remembered that SPPI cash flow must include remuneration consistent with the underlying lending agreement. If the contract cash flow includes remuneration for equity price risk, it is no longer SPPI cash flow. For example, the time value of money is the interest factor that only considers the time consideration. Usually the period when the interest rate is set has an intrinsic connection with the interest rate used, such as the 3-month LIBOR applied to the March period. If the interest rate of the financial asset is reset regularly, but the reset frequency does not match the interest rate term, if the interest rate is reset by 3 months LIBOR every month, the time value factor of the currency is modified, and it is necessary to evaluate whether the modified contract cash flow is still SPPI, that is, it is necessary to determine whether the modified contract cash flow after the currency time value factor is significantly different from the contract cash flow before the modification. The specific method is to find a comparable financial asset, which resets the interest rate by 1 month LIBOR every month. In addition, it is the same as the financial asset that resets the interest rate by 3 months LIBOR every month in terms of term, credit quality, etc., and if the cash flow of the two is significantly different, the modified contract cash flow is not SPPI. For example, leverage will also change the economic relationship between principal and interest . Important leverage increases the variability of contract cash flow, making it no longer have the economic characteristics of interest. Options, forward contracts and swap agreements are all financial assets that contain important leverage, and their cash flow is not SPPI. Financial assets include terms that change the time or amount of the contract cash flow, and may also change the economic relationship between principal and interest. The reporting entity needs to evaluate whether the cash flow that considers the impact of the terms and the cash flow that does not consider the impact of the terms meets the SPPI characteristics. For example, for financial assets with advance payment terms, if the cash flow when the advance payment occurs and the cash flow when the advance payment does not occur are consistent with the SPPI characteristics, the contract cash flow of the financial asset is SPPI. In addition, in the case where the government or regulator sets a regulated interest rate, IFRS9 points out that such cash flow can be regarded as SPPI as long as the risk of inconsistent with the underlying lending agreement is not introduced.
, followed by valuation and impairment. In principle, valuation and impairment system is independent of the transaction processing system, and the valuation and impairment processing results should not be returned to the transaction processing system to avoid affecting the service efficiency of the transaction processing system 7*24 hours a day.
In the next few years, my country's commercial banks need to invest a lot of resources in the implementation of IFRS9. This will not only affect the financial department, but also require participation and cooperation from risk management, company reporting, investor relations and other departments. Banks need to re-establish accounting policies and internal control systems to ensure continuous review of estimates of credit losses.At the same time, banks also need to upgrade or rebuild their internal information systems to ensure that relevant raw data is provided to support the estimate of credit losses and provide the information to be disclosed.
IFRS9's implementation challenges include financial, credit risk, coordination of IT and other teams, resource limitations of financial reporting teams, and support from risk teams. From the perspective of the bank, system development and information integration are also seen as a specific challenge. Because many banks now have multiple systems that are largely independent of each other, banks will find it difficult to capture credit risk information that is fully consistent with financial reports, thereby conveniently supporting IFRS9 requirements.
For the IFRS9 new financial instrument standards, what we need to learn is not only the specific content of the standards, but also the guiding ideology transmitted behind the standards. First, the connection and integration of accounting system information and risk management system information, and second, the trade-offs and compromises between theoretical correctness and practical operability. These two points will also be the logical basis for future business and IT systems to practice.
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