The financial landscape across Europe has been shaped by a series of unprecedented challenges over the past few years, with economic uncertainty and evolving regulations continuing to impact the banking sector. The 2024 Benchmark Study on the Financial Reporting of European Banks provides an insightful analysis of how these institutions have managed expected credit losses (ECL) amid ongoing volatility. This article delves into the key findings of the study, highlighting trends in ECL charges, changes in coverage ratios, and the impact of forward-looking information on financial reporting.
ECL Charges and Profitability
The year-end (YE) 2023 marked a notable decrease in net ECL charges in the profit or loss statements of European banks, reflecting a -3% change compared to the previous year. Despite this overall decrease, the financial results reveal a diverse range of outcomes among the banks surveyed. While 21 banks reported positive growth in their operating profits before accounting for ECL charges, five banks experienced a decline. This variation underscores the differing strategies and risk profiles adopted by banks in managing credit risk during periods of economic uncertainty.
Coverage Ratios and Stage Allocation
A critical metric in assessing the financial health of banks is the ECL coverage ratio, which indicates the proportion of expected credit losses relative to the total credit exposure. The study observed a slight decline in the average amortized cost loan coverage ratio, dropping from 1.40% in 2022 to 1.36% in 2023. This decrease is primarily attributed to a reduction in coverage for stage 3 instruments, which was not fully compensated by increases in stages 1 and 2. The findings suggest that banks have continued to focus on managing exposures at earlier stages, potentially reflecting cautious optimism regarding future economic conditions.
Post-Model Adjustments and Overlays
Another significant trend highlighted in the study is the continued reduction in the use of post-model adjustments (PMAs) or overlays. These adjustments, which allow banks to account for risks not captured by standard models, have been on a declining trend since 2021. By YE 2023, the weight of PMAs in ECL allowances had dropped to 12%, down from 14% in 2022. This reduction indicates a gradual return to reliance on standard models as the primary tool for credit risk assessment, reflecting an improved confidence in these models’ ability to capture the necessary risks.
Forward-Looking Information
The integration of forward-looking information into ECL calculations remains a cornerstone of IFRS 9 compliance, allowing banks to anticipate potential future losses based on macroeconomic forecasts. The 2024 Benchmark Study shows that banks continue to grapple with the challenges of incorporating this data effectively, with variations in how different institutions apply forward-looking adjustments. The ongoing uncertainty in global markets has made this process more complex, leading to a wide range of outcomes in the ECL allowances reported by banks.
Conclusion: Estimator9 – FineIT‘s Solution for ECL Management
In light of these findings, it becomes increasingly clear that managing expected credit losses in a volatile economic environment requires sophisticated tools and strategies. FineIT’s Estimator9 is a fully automated software solution designed to address these challenges. Estimator9 streamlines the process of calculating ECL by integrating advanced models with real-time data inputs, ensuring that banks can maintain compliance with IFRS 9 while minimizing the risk of discrepancies. By automating the ECL calculation process, Estimator9 not only enhances accuracy but also reduces the time and resources required for financial reporting. As European banks continue to navigate the complexities of financial reporting, solutions like Estimator9 will be indispensable in maintaining robust and reliable financial statements.