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Basel Committee moots 5-year IFRS 9 delay to avoid bank 'capital shock'

Imminentchanges to the way that banks account for credit losses may have to be phasedin during a transition period of up to five years to give lenders time toprepare and avert a "capital shock," the world's top bankingregulator said.

Ruleson earlier provisioning of expected credit losses under so-called IFRS 9standards due to take effect from Jan. 1, 2018, could have a"significantly more material" effect on banks than foreseen andresult in an unexpected decline in capital ratios, the Basel Committee onBanking Supervision said in a consultative document Oct. 11.

"TheCommittee currently sees the primary objective of a transitional arrangement asbeing to avoid a 'capital shock' by giving banks time to rebuild their capitalresources following a negative impact arising from the introduction of ECLaccounting," the committee said, adding that it assumed a transitionperiod should last three to five years.

Europeanbanks have complained of doubts over how IFRS 9 would interact with their capitalrequirements. The continent's top banks might have to make provisions for asmuch as an additional €61.5 billion in loan losses, according to Barclaysanalysts. U.S. banks will only have to apply new rules on expected credit lossfrom between 2020 and 2021.

TheBasel Committee said it was still unsure how the transition would be appliedand what measure of capital it would refer to. One possible approach would beto spread the impact on common equity Tier 1 capital over a number of years.Banking regulators could also phase in recognition of new provisions that haveto be made under the expected credit loss rules.

Commentson the consultative paper are due by Jan. 13, 2017, the Basel Committee said.The possible capital hikes due to IFRS 9 come as banks are already bracingthemselves for fresh capital charges from upcoming changes to Basel rules on how they calculaterisk.