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While the ECB supports transitional arrangements towards the full application of IFRS 9 as regards its impact on capital ratios, ECB Banking Supervision is of the view that this should not be at the discretion of credit institutions, but either mandatory or at the discretion of the competent authorities.
In ECB´s view, only the initial impact at the date of application of IFRS 9 should be subject to phase-in (static approach), rather than the impact being recalculated at every reporting date during the transition period (dynamic approach). Transitional measures should be limited to giving credit institutions more time, when applying IFRS 9, to deal with its initial impact on regulatory CET1 capital. The ECB is not in favour of a general phase-in for IFRS 9 provisions during the transition period, including for new provisions made after the date of application, as it would effectively act as a prudential filter, thus delaying the full application of IFRS 9 and in turn postponing the resolution of the “too-little-too-late” issue of incurred loss accounting.
The ECB supports the approach of considering the full impact of IFRS 9 on CET1 capital. It is also possible that the increase in provisions will be partially or even fully neutralised by other effects, such as changes in asset classification stemming from the general implementation of IFRS 9. An add-back considering only the increase in provisions could, in such cases, even result in CET1 capital being increased during the transition period, which would not be justified.