The effects of the IFRS 9 impairment model on Maltese banks

Abstract

Purpose: The objectives of this research are to identify how the new impairment model is going to effect local banks on governance level, internal procedures, policies and internal controls. Moreover to shed light on judgemental key words being “default” and “significant increase” and to determine if it will lead to increased transparency in the financial statements of a bank. Design: Objectives were achieved through the conduct of semi-structured interviews with 14 participants experts in the banking industry holding different professional positions mainly CFOs, auditors and regulator. Findings: Various findings have been unearthed, most worth mentioning being; the majority of local banks are behind IFRS 9 implementation schedule, discussions are still to be carried out amongst banks, auditors and regulator where grey areas exists such as what classifies as ‘low’ credit risk and whether a general practice will be adopted. Other findings include the volatility in bank’s profits and reserves, whether investors are going to be in a better position to understand bank’s financial position and finally whether IFRS 9 is the solution to avoid another financial crises like the one witnessed in 2008. Conclusions: Banks are experiencing an internal overhaul, with gathering the required data to generate statistically reliable Probability of Defaults (PDs) and Loss Given Defaults (LGD) being the main challenge. However, IFRS 9 also represents an opportunity as through the required sophisticated model, they are in a position to price better their exposures and hence enhance their competitiveness. Value: It is hoped that this study contributes to the enhancement of IFRS 9 implementation by local banks. Appropriate discussion with all stakeholders will be beneficial to the Maltese banking industry whereby a general consensus can be reached on judgmental areas. Recommendations include, but are not limited to, for local banks to look at IFRS 9 as an opportunity rather than another regulatory cost of compliance and encouraging local banks to hold discussions with their respective auditors throughout the implementation phase.