By Manesh Samtani, Regulatory Asia | Posted on June 2, 2020
Pierre Latrobe said banks needed to be more flexible in incorporating all the latest reasonable and supportable information into their ECL models, including forward-looking information. According to a new paper by Mazars, banks in Hong Kong need to review their scenario construction methodologies to determine their expected credit losses (ECL) under HKFRS 9.
The document analyzed the impairment process of 22 banks in Hong Kong based on their published financial statements as of December 31, 2019. While this has yet to account for the impact of Covid-19, which will be factored into the 2020 interim and year-end financial statements, the credit quality of most of the banks covered in the study has still declined due to other factors, including the US-China trade dispute, Hong Kong's continued The social unrest and weaker global economic growth research shows that moving from stage 1 of impairment to stage 2, the bank's gross loans and advances moved by -1.22 basis points, which means that the credit risk of the instrument has been since inception Significantly increased recognition.
However, 18 of the 22 banks listed Covid-19 as a non-adjusting event after the balance sheet date in the notes to their financial statements, and five of them explicitly stated that they had conducted stress tests or other forms of analysis to assess its impact. The impact of the pandemic on its financial resilience. While the stress test results suggest banks have sufficient capacity to deal with the potential impact of Covid-19, the paper stresses that the real impact on the economy will only become apparent "after the temporary relief measures have worn off".
"It is understood that some businesses will repay their loans in full or become distressed in the short to medium term," it said. "To make matters worse, the scale, duration and shape of the recovery [of the crisis] remain uncertain." value process, a “business as usual” (BAU) approach unable to cope with a sharp increase in loan volumes, frequent announcements of new regulatory measures, extreme market volatility, and a deluge of new information.” The white paper outlines banks seeking to improve their impairment operating models Recent areas of focus range from schema building and modeling to governance, IT infrastructure and data quality.
"While many see this as a challenge, it should also be seen as an opportunity to improve the impairment process and become more agile and responsive to the external environment," the paper said. Given the current uncertainty and reflecting the rapidly changing environment , Hong Kong banks need to be more flexible in incorporating all the latest reasonable and supportable information, including forward-looking information, into their ECL models, according to chief financial officer Pierre Latrobe. A service of Mazars Hong Kong and the author of this article.
"Improving the impairment model will require a joint effort of experts across the bank, including business, risk, finance, economists, internal audit and IT." Latrobe said banks would also need to communicate with governments about support measures and regulators Subsequent clarifications were issued to keep pace. "Indeed, they greatly influenced the development of scenarios, scenario weights, and risk parameters used to determine ECLs."