A new set of accountancy rules due in 2018 could hit lending levels and increase the cost of mortgages.
IFRS9, which has been issued by the International Accounting Standards Board, will change the way banks treat bad debts.
At present lenders must calculate and create a loan loss provision for accounts in arrears. Under the new accounting standards coming into effect in January 2018, every loan will have a provision reflecting an estimated future loss, even if the loan is classed as “performing”.
The new standard has been devised to allow banks to book los-ses before they occur, whereas currently they cannot do so until the losses have been realised. It will enable banks to make adequate provisions for current and potential losses.
A Deloitte survey published in May shows banks expect their loan provisions to increase by up to 50 per cent on current levels. Fifty-eight per cent of the 59 banks surveyed said there was either “potentially” or “certainly” a chance of mortgages becoming more expensive as a result of the increased provisions.
Deloitte lead financial instruments partner Andrew Spooner says: “IFRS9 fundamentally changes the way we think about bad debt provisions. There really is no distinction between performing and non-performing loans, with the current focus on non-performing.
“In the future, everything will have a provision that reflects estimated future credit losses. The
effort will be working out how much that is.
“Increasingly, lenders are telling us that pricing of mortgages could be impacted by the new standard. Uncertainty as to how prudential supervisors will treat the increase in provision stock for capital purposes may be a factor in pricing.”
Experts say another knock-on effect of the new rules could be reduced lending levels.
HML director of securitisation services Steve Rogers says: “If lenders don’t prepare for this regulation now or have robust models in place, they could end up forecasting higher
potential expected losses. And in turn, this may restrict their lending appetite and have an impact on business volumes for brokers.”
The new rules are to be adopted by most developed nations, including the UK. However, the US is excluded. The European Union is expected to ratify the changes before the end of the year.
What is IFRS9?
IFRS9 is designed to improve the way assets and liabilities are accounted for in the wake of the financial crisis. There are four key strands to the new standard – classification and measurement; impairments; hedge accounting; and ‘own credit’.
It is impairments which could affect lenders when the rules come into force in 2018.
The main objective of the new impairment requirements, according to the IASB, is “to provide users of financial statements with more useful information about an entity’s expected credit losses on financial instruments”.
It says: “The model requires an entity to recognise expected credit losses at all times and to update the amount of expected credit losses recognised at each reporting date to reflect changes in the credit risk of the financial instruments.”