Possible Postponement Of BdE’s New Provisioning Circular

1 March 2016 – Expansión

The entry into force of the new provisioning circular being prepared by the Bank of Spain, which is scheduled for 30 June, may have to be delayed. Spanish financial entities have been sending their comments about the circular to the regulator since January 22. The circular represents a modification to existing accounting standards regarding provisions, in light of the entry into force of the international standard IFRS 9, which will take effect from 2018.

“We think that the Bank of Spain will accept the postponement of the entry into force (of this new circular), until at least September”, explained a senior manager at one unlisted bank. One of the main difficulties involved with fulfilling the initially-planned timeframe is that “significant software development is required for the application of the new standard”. Sources at another three listed banks share this opinion.

The sector expects minimal impact from the entry into force of the circular. The Bank of Spain estimates that the provision level for the sector as a whole will not change much, according to one source. But some entities may need to significantly increase their provisioning levels, depending on what their portfolios are like. “With this circular – an intermediate step, ahead of the introduction of IFRS 9 – the Bank of Spain is preventing entities from leaving the adjustments required by the new standard until the last minute”, according to the Finance Director of one bank. We expect the coverage requirements to be tightened, especially for consumer credit and foreclosed assets.

The entities are worried because it will be mandatory for them to update the appraisals of their loan guarantees, which may affect the loan to value ratios of some mortgage loans, and therefore the provisioning requirement, depending on the age of each portfolio. The new standard will require the elimination of the ‘substandard’ credit category, which exists only in Spain, and the creation of categories of loans that will have to be provisioned because they display certain characteristics, beyond the individual circumstances of each one.

Original story: Expansión (by Michela Romani)

Translation: Carmel Drake

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