Agreed-upon procedures’ conclusions on key IFRS 9 and credit risk related requirements
During 2021, the CSSF requested agreed-upon procedures to be performed by external auditors on key IFRS 9 and other credit risk related requirements.1
The agreed-upon procedures highlighted room for improvement on the following requirements:
CIs must have an adequate governance at local level around the expected credit loss model (especially senior management involvement, independent and documented validation, data quality check, and back-testing).
CIs’ policies and procedures shall include
- A definition of forbearance pursuing to Article 47b (1) of Regulation (EU) No 575/2013 (CRR), including the examples covered by Article 47b (2) of the CRR in order to flag those situations at least as forborne;
- A list of criteria relevant for the business of the CI illustrating the criterion “experienced difficulties in meeting its financial commitments” which triggers a forborne classification. When assessing the financial difficulties of the borrower, CIs should consider at least the rebuttable circumstances mentioned in the paragraph 151 of EBA/GL/2018/06.
Forborne exposures have to be classified either in stage 2 (existence of a significant increase in credit risk) or in stage 3 (the exposure is credit impaired) unless the CI is able to demonstrate, usually by means of a client-specific assessment, that, despite the fact forbearance measures have been granted, the credit quality of the debtor has not deteriorated significantly.
NPE & defaults exposures
CIs have to calculate any potential diminished financial obligation for forborne exposures in order to trigger a default classification (point (d) of Article 178(3) of CRR). The CSSF requests CIs to comply with the EBA/GL/2016/17 and in particular with paragraph 51 which imposes to classify forborne exposures with a diminished financial obligation above a threshold set by the CIs as default. Said threshold cannot be higher than 1%.
CIs must have well-documented and up-to-date collateral valuations. CIs shall critically review the valuation, in particular focusing on comprehensibility (whether the approaches and assumptions are clear and transparent), the prudence of assumptions (e.g. as regards cash flow and discount rates), and the clear and reasonable identification of comparable properties used as a value benchmark. Collateral valuations have to take place at least once a year for commercial immovable property and at least once every three years for residential immoveable property in accordance with article 208 of CRR and section 7 of EBA/GL/2020/06. Moreover, the valuation of immovable property collateral is updated on an individual basis at the time the loan is classified as a non-performing exposure, and at least once a year while it continues to be classified as such.
Staging and provisioning
In order to be in line with IFRS 9, stage transfer triggers should not be defined in absolute terms and should be determined at instrument level (disregarding any guarantor protection). The SICR assessment must be assessed in a timely manner, based on all relevant and available information including forward looking information.
Regarding the expected credit loss (ECL) model, a CI shall measure expected credit losses in a way that reflects an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes and shall measure expected credit losses based on reasonable and supportable information about forecasts of future economic conditions (forward looking information).
The CSSF expects CIs to review the compliance of their policies and procedures with the above-mentioned requirements.
1 Credit institutions (CIs) in scope were those having a significant credit activity and publishing their annual accounts in Luxgaap. For such CIs, compliance with IFRS 9 is not covered by the external audit of the annual accounts.