The regional international financial institution International Investment Bank (IIB) held a conference in Moscow on September 28-29 to prepare partners for the introduction of the new IFRS-9 international accounting standards. Alexandru Florescu, Deputy Chairman of the IIB’s board, spoke exclusively with bne IntelliNews about the challenges and opportunities that the introduction of the new rules will bring.
Q: What is the main difference of IFRS-9?
A: The main difference is a better organisation of the business strategy and the business model of every financial institution. This is a positive side because under this new standard more financial instruments will be classified under several business models and they will have to be kept in these business models. [The new business models] will bring about a more disciplined way of accounting. This is one side of the coin.
The other side concerns the approach to impairment and risk management. Under the current financial reporting standards, the approach is rather reactive, but under IFRS-9, provisions will be established from the moment a financial instrument is signed and disbursed. It's a forward looking approach for impairment, meaning that whenever an institution makes an investment, they reflect in the financial statement the possibility that this investment will not make good.
Q: What is going to be the impact of IFRS-9?
A: IFRS-9 is expected to stimulate a pro-cyclical reaction from the financial institutions, especially from those driven by profits, such as commercial banks. As for multilateral development banks, such as IIB, it will somehow restrict the possibility for us to fulfil our mandate because the interest of our shareholders is to act counter-cyclically, and to support those sectors of the economy which are vulnerable get access to funding. The new standard – at least, at first sight – will have a tendency for pro-cyclicality.
Q: What are other challenges for development banks arising from the introduction of IFRS-9?
A: There will be an additional burden on capital, due to the new forward looking approach on impairment assessment – expected credit loss. There will be pressures on pricing, especially on loans – immediate negative impact on the profit and loss statement will definitively affect banks’ rules on pricing. Also, there will be a need to develop and enhance business processes, decision-making systems and IT solutions in order to effectively manage the operational processes and financial reporting.
Another challenge will be new pressures on the risk appetite. In the face of additional pressure on capital and strengthening the requirements for IFRS-9 provisions, development banks will face the need to search for a trade-off between risks and mission. We will need to incorporate macroeconomic forecasts in our models, such as data sources, reliability, back-testing and validation of models. All assessments will be highly sensitive to peaks and bottoms of economic cycles. From the operational point of view, the process will be much more complex, and we'll have to disseminate a new mentality, introduced by the new standard, among all business units in our institutions.
The front office should know how their investments are classified and what impact it will have on the general balance sheet. Middle office will have to know how to calculate the impact. Promoting this new mentality is going to be a big challenge.
Q: Is there a way to turn these challenges into opportunities?
As commercial banks are likely to be more and more pro-cyclical, development banks will have more space and more niches in the market to act counter-cyclically.
With the new standards, you will be able to better formulate the business models. You will see where the market is going, and, definitely, there will be niches corresponding to the mandate of development banks. And when you target those niches, you'll only have to adjust your risk management to deal with them. You will improve and consolidate your monitoring requirements and collateral requests, your dialogue with the beneficiaries. Overall, we expect to see a reinforced mandate in financing vulnerable, but vital economic sectors in our member states, such as small and medium enterprises, green investments, research, development & innovation and venture capital.
The development part of our mission will become even more exponential. We expect shareholders to raise this issue during the coming years. At the same time, as our mission is complementary to commercial banks and with high social impact, we also expect reinforced support from the entire financial community for the development banks’ activities in order to allow us to deploy our mission properly to its full potential and avoid forcing development banks to act as commercial institutes.
Q: What will be the impact of IFRS-9 on risk management?
A: There will be a need for more efficient monitoring, increased focus on forecast and anticipation of risk events, and the stronger incorporation of macroeconomic indicators in the risk analysis. The coherent and reasonable application of macroeconomic forecasting and its proper reflection in the IFRS-9 model is absolutely vital.