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March 30, 2020 01:28 PM

What governments can learn from businesses and regulators

Posted by Jan Bouwens

Banks and businesses have been calling for IFRS 9 Financial Instruments to be lifted. The forward-looking ‘Expected Credit Loss’ impairment model of IFRS 9 was introduced to reduce the likelihood that another financial crisis would stifle the banking system. IFRS 9 requires that financial assets such as loans are valued realistically by requiring financial institutions to make the provisions to cover loans to distressed borrowers before they start to default. Because no one can possibly tell under the current conditions whether borrowers will be able to service their loans, it is argued by some that it makes no sense to impose IFRS 9 since thiswould require banks to make provisions that will turn out to be way too pessimistic once the Covid-19 crisis has vanished.  Relentless application of IFRS 9 would lead banks to make huge provisions and report significant losses. The Bank of England “gave a strong signal that regulators and auditors would be lenient in interpreting the new rules - and might not yet insist on banks factoring in the impact of Covid-19.” In other words, we freeze the market and sit this out until the Covid-19 crisis is over and protect our financial system against contamination. 

 

In light of this swift reaction, I wonder why we did not freeze the movement of people as quickly as we froze bank’s balance sheets, i.e. by late January 2020? Regardless, we did not and as a consequence the Covid-19 crisis looks set to drag on way longer than necessary in Europe, the UK and the USA. 

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About Jan Bouwens

University of Amsterdam & Cambridge University Judge Business School

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