Bank Of Spain Plans Provision Changes From June

16 January 2016 – El Confidencial

The Bank of Spain wants credit institutions to incorporate new accounting standards, prepared by the European Commission with a view to 2018, into the presentation of their results from June onwards. The change represents the further tightening of the multi-million provisions that the sector has been recognising in recent year, given that, from now on, the banks will have to adjust their accounts to take into account expected losses on each one of their loans rather than incurred losses. The measure will result in significant volatility, which may affect banks’ results for the first half of this year.

As a result, the accounting legislation known as Circular 4, which was first published in 2004 and established public information standards for financial entities, will have to be adapted to the new criteria presented by the International Accounting Standards Board (IASB). That body that has worked on the definition of the standards captured within IFRS 9, which, in turn, will replace those currently in force across the whole of Europe under the definition of IAS 39. The adaptation of the entire accounting system comes at a particularly critical time for the Spanish banking sector, which has had to undergo a restructuring process in recent years under the local anaesthetic of a rescue, which was requested in June 2012. (…).

The first drafts of the legislation being managed by the institution led by Luis Linde include apparent relief for credit entities given that the Bank of Spain plans to try and eliminate the infamous and onerous category of sub-standard risks. This classification forces banks to recognise provisions in successive phases within a pre-determined calendar against loans that may be affected by a subjective incidence of default. (…).

Sub-standard loans, which are unique and exclusive to banking regulations in Spain, will move onto a better life, but in exchange, a new index is going to be created, known by the title “special monitoring”. This will have, where appropriate, a greater impact on the financial statements of credit institutions. In its future circular, the Bank of Spain is going to require that banks put strict calculation models in place to ensure the expected loss of all of their loans from the moment they are granted and over the whole life of the investment. When a loan becomes doubtful, the entities will have to recognise the entire provision in one go, with the resulting momentary hit to the income statement.

Another novelty arising from the accounting changes will be the disappearance of the generic provision, which has been one of the main hallmarks of financial regulation in Spain. The generic provision will be substituted by a collective provision, which…must forecast expected losses on the entire loan portfolio up to one year ahead. The reform will be cushioned by a transitory process, which is currently being subjected to consultation with the financial institutions themselves, which must have their own business models in order to classify the quality of their investments. (…)

Original story: El Confidencial (by José Antonio Navas)

Translation: Carmel Drake