[FRANKFURT] The introduction of a new accounting standard for financial instruments will be challenging for the banking industry, especially when it comes to modelling for expected losses, the European Central Bank's supervisory chief said on Tuesday.
"The completion of this accounting standard as one of the responses to the financial crisis will bring major changes and challenges to the industry, mainly regarding the implementation of the new expected loss model," said Danièle Nouy, chair of the ECB's banking supervisory arm.
She was referring, in remarks for a speech to be delivered in Paris, to the introduction of the International Financial Reporting Standard 9 (IFRS 9), due to take effect from 2018.
The rule was called for by leaders of the Group of 20 economies during the financial crisis, in which banks had proved too slow in covering for soured loans.
It marks a radical change for banks, requiring them to make some provision - at a level according to the bank's view on the riskiness of a loan set against the economic outlook - even on the first day of the loan, and long before a default, the current trigger for provisioning.
The rule was written by the International Accounting Standards Board but needs formal European Union endorsement to become mandatory in the 28-country bloc. This process is taking some time, raising doubts about the start date.
Last week, Paul Ebling, a senior regulator at the Bank of England, said Britain's top banks must comply with the IFRS 9 from 2018 even if there is delay in the rest of Europe.