Evidence on IFRS 9 implementation from a sample of Italian banks and other financial intermediaries

Since its entry into force, IFRS 9 has posed significant challenges to financial institutions, partly due to its principle-based nature, which leaves room for the adoption of a wide range of practices, as confirmed by the COVID-19 experience. Given the importance of a sound IFRS 9 implementation, also for supervisory purposes, Banca d'Italia conducted a survey on a sample of banks and non-bank financial institutions to monitor the approaches adopted during the pandemic. The evidence confirms the use of diverse practices, some of which could hamper a sound implementation of IFRS 9 by leading to underestimated ECLs or delayed stage transfers. These effects would in turn have a negative impact on institutions' own funds and on the indicators used for supervisory purposes. Moreover, a sound implementation of the IFRS 9 impairment model is also key from a financial stability perspective, as the adoption of appropriate provisioning practices helps to mitigate the risk of pro-cyclical effects arising from a possible sudden increase in credit losses during an economic downturn.