IFRS 9 transitional arrangements – calculation of the static component in case of afterwards permission for the IRB approach

If an institution gets the permission to use the IRB approach only after 1 January 2018 or the date of initial application of IFRS 9, as applicable, how should the institution calculate the amounts for the transitional arrangements permitted by Article 473a CRR and, in particular, the static component according to paragraph 2 of Article 473a CRR for those IRB exposures to which the standardised approach applied on the 31 December 2017 or the day before the date of initial application of IFRS 9, as applicable?

An institution applies the standardised approach for credit risk on the 31 December 2017 or the day before the date of initial application of IFRS 9, as applicable, and decides to apply the transitional arrangements set out in Article 473a of Regulation (EU) 575/2013 (CRR). However, as permitted by the second sub-paragraph of Article 473a(9) CRR, the institution decides to not apply paragraph 4 of Article 473a CRR which determines the dynamic component, thus the institution calculates only the amount AB_SA,2 for the static component according to paragraph 2 of Article 473a CRR. Afterwards the competent authority permits the institution to use the IRB approach for calculating capital requirements for credit risk for exposures to which the standardised approach applied on the 31 December 2017 or the day before the date of initial application of IFRS 9, as applicable. The institution now considers two possible approaches for the calculation of the transitional arrangements set out in Article 473a CRR: Approach A: The institution recalculates the static component as if these exposures had been under the IRB approach already at 31 December 2017 or the day before the date of initial application of IFRS 9, as applicable. For this purpose, the institution needs to retrospectively calculate the sum of expected loss amounts calculated in accordance with Article 158(5), (6) and (10) that would have applied as of 31 December 2017 or the day before the date of initial application of IFRS 9, as applicable, and use this sum for calculating A_2,IRB in accordance with paragraph 2 as specified by point (a) of Article 473a(5) CRR. Approach B: The bank maintains for these exposures the same value of the static component as calculated when initially applying IFRS 9 on the 1 January 2018, by using expected loss amounts of zero for these exposures in the calculation of A_2,IRB as specified by point (a) of Article 473a(5) CRR. The expected loss amounts as of the 31 December 2017 or the day before the date of initial application of IFRS 9, as applicable, are zero for these exposures because Article 158(5), (6) and (10) CRR had not been applicable to these exposures at that date due to having used the standard approach for credit risk. Approach A could be difficult to apply in practice because the institution did not apply the IRB approach on the 31 December 2017 or the date of initial application of IFRS 9, as applicable, thus did not estimate for this date all the risk parameters necessary for calculating the expected loss amounts. Moreover, afterwards reducing the amounts calculated for the static component by the sum of expected loss amounts is not consistent with the actual own funds impact when first applying IFRS 9, because at that date there was no reduction of own funds related to expected loss amounts under the IRB approach. Approach B correctly reflects the actual own funds impact when first implementing IFRS 9, and is therefore not only consistent with the intention but also with the wording of Article 473a(5)(a) CRR, if reading “as of” as referring to the sum of expected loss amounts calculated in accordance with Article 158(5), (6) and (10) CRR that was existent on the 31 December 2017 or the day before the date of initial application of IFRS 9, as applicable, which is indeed zero for all those exposures not in the scope of these Articles at this date due to applying the SA for credit risk.