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JBA – Japanese Bankers Association

01/13/2017 | Press release | Distributed by Public on 01/15/2017 21:05

Comments on the Consultative Document and the Discussion Paper: Regulatory treatment of accounting provisions, issued by the Basel Committee on Banking Supervision (PDF)

January 13, 2017

Comments on the Consultative Document and the Discussion Paper: Regulatory treatment of accounting provisions, issued by the Basel Committee on Banking Supervision

Japanese Bankers Association We, the Japanese Bankers Association ("JBA"), would like to express our gratitude

for this opportunity to comment on the consultative document and the discussion paper: Regulatory treatment of accounting provisions, issued on October 11, 2016 by the Basel Committee on Banking Supervision ("BCBS").

We respectfully expect that the following comments will contribute to your further discussion.

  1. Comments on the consultative document

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    We support the introduction of expected credit loss (ECL) models in accounting provisioning given that it will help us achieve risk recognition at an early stage. Nonetheless, the following points would need to be taken into account with regards to the introduction of ECL models: (i) introduction of ECL models will vary depending on accounting standards; (ii) even where ECL models are to be introduced, the timing of introduction will be different across jurisdictions; and (iii) assumptions and methodologies used under the ECL models will also be different. Based on these differences between each jurisdiction's GAAP, the BCBS should carefully consider areas to be harmonized in their regulatory treatment and those to be allowed for adjustments in line with each jurisdiction's circumstances.

    Furthermore, it is hard to say that sufficient surveys and analyses have been performed to identify the level of changes in provision amounts within the entire banking sector resulting from the transition to ECL models. As sufficient factors are unavailable to make decisions for reviewing the regulatory treatment of accounting provisions, we therefore support the BCBS's proposal to "retain the current regulatory

    treatment of accounting provisions for the interim period". Nonetheless, as the BCBS is aware of, it is important to sufficiently assess the potential impact on the entire banking sector by conducting a comprehensive quantitative impact study and other related exercises.

    If, as a result of such studies, it turns out that the introduction of ECL models will cause a significant impact, an appropriate transitional arrangement should be implemented as proposed in the consultative document. The transitional arrangement should be as simple as possible in order to minimise the calculation burden on banks and supervisors and to enable market participants to readily observe the impact of the transitional arrangement. The BCBS should also pay attention to differences between accounting standards and allow national discretion to make adjustments if deemed necessary.

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  2. Proposal to retain the current regulatory treatment of provisions

    We support the BCBS's proposal, "for an interim period, jurisdictions would extend their existing approaches to categorising provisions as general provisions ("GP") or specific provisions ("SP") to provisions measured under the applicable ECL accounting model".

    Furthermore, to ensure consistency within jurisdictions, it would be useful if regulators provide guidance, as appropriate, on categorising ECL provisions as GP or SP in their jurisdictions, as mentioned in the consultative document.

  3. Transitional arrangements

    As stated in the general comments, it is preferable to implement a simple transitional framework so that market participants will be able to readily observe the impact of the transitional arrangement.

    Among the approaches presented in the consultative document, Approach 1 (Day 1 impact on CET1 capital spread over a specified number of years) is practically simple and is considered to be optimal.

    The transitional arrangements described in the consultative document intend to reduce only the effect of ECL models when they are initially applied. However, after the initial application, it is likely that the amount of provisions will change considerably due to changes in economic environments or other factors, resulting in more volatility in

    the amount of regulatory capital. Taking these factors into consideration, the BCBS should consider allowing some adjustments even after ECL models are initially applied.

  4. Others

    A flexible approach should be taken with respect to the introduction of transitional arrangements by giving discretion to national regulators. As accounting standards differ between jurisdictions, application and implementation date of transitional arrangements to those jurisdictions not adopting IFRS or USGAAP are not determined yet at this point in time. Given the differences in accounting standards or varied practices across jurisdictions, application and implementation date of transitional arrangements should be determined at the discretion of each jurisdiction.

  5. Comments on the discussion paper (DP)

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    In our understanding, the incorporation of ECL models into accounting standards, particularly IFRS 9, intends to allow banks to apply internal models (e.g. internal ratings-based ("IRB") approach) for calculating loan loss provisions with a view to improving consistency with the regulatory capital framework. The BCBS, however, is considering constrains on the use of internal models for credit risk measurement, which may result in less consistency between accounting standards and the regulatory capital framework. Inconsistencies between the two will not only increase banks' practical burdens but also may lead to inconsistency in disclosure and may mislead market participants. Given this, when discussing the regulatory treatment of accounting provisions, it is important to assess both the accounting standards and the regulatory framework entirety in order to ensure consistency between them.

    Furthermore, as mentioned in our comments on the consultative document, it is likely that the introduction of ECL models might lead to considerable changes in the amount of provisions in each period, and it might cause more volatility in the amount of regulatory capital. As such, the BCBS should sufficiently analyse the potential impact that such volatility in the regulatory capital may have on the bank's financial intermediary function and also on macroeconomy and the financial market. If deemed necessary, the comprehensive review of the regulatory treatment of provisions should also be considered.

    In addition, in discussing the introduction of ECL models in accounting provisioning, the following points would need to be taken into account with regards to the introduction of ECL models: (i) introduction of ECL models will vary depending on accounting standards; (ii) even where ECL models are to be introduced, the timing of introduction will be different across jurisdictions; and (iii) assumptions and methodologies used under the ECL models will also be different. Based on these differences between each jurisdiction's GAAP, the BCBS should carefully consider areas to be harmonized in their regulatory treatment and those to be allowed for adjustments in line with each jurisdiction's circumstances.