Novel Challenges from "Novel Risks"

Next level requirements for IFRS 9 provisioning

In their latest whitepaper, our experts explain how the European Central Bank is increasingly focusing on “Novel Risks” (NR) – in particular ESG, geopolitical, energy supply and supply chain risks – in the context of IFRS 9 provisioning.

Starting point is the ECB’s July 2024 benchmark report on the use of overlays and the designation of NR as a supervisory priority for 2026–2028, which means that all institutions directly supervised by the ECB must concretely address the representation of these risks within the IFRS 9 framework. The ECB underlines that it will use the full powers granted under the SSM Regulation for this purpose. Its expectations are likely to become the market standard that national supervisors will also follow.

Treating NR solely via macroeconomic variables such as GDP is explicitly classified by the ECB as bad practice. Instead, banks are expected to capture NR in a granular way, identify their drivers and transmission channels, and calibrate provisions as far as possible via in‑model rather than purely top‑level adjustments. This approach not only enhances the explanatory power of IFRS 9 projections, but it also creates the basis for effective, risk‑based steering of NR.

The whitepaper outlines a pragmatic roadmap for implementation: in the short term, institutions should link the NR considered in IFRS 9 to the materiality analysis of their risk inventory, create a systematic list of scenarios and affected exposures, and refine the governance for NR‑related overlays so that top‑level adjustments become the exception and in‑model adjustments the standard. In the medium term, banks should build a robust data and methodological foundation to assess the quantitative impact of NR on provisions and set up a dedicated monitoring and reporting framework.

Overlays or temporary adjustments will remain an integral part of IFRS 9 provisioning. Given the growing scrutiny by auditors and supervisors, the paper stresses that institutions should not regard NR merely as an additional compliance task, but as a new reality of their business and credit risk management – and thus as an opportunity to align their business model with a changing risk environment.

You can download the complete white paper at the top of this page.