Circular to All Licensed Banks

Greetings,

The Central Bank of Jordan, in its continued commitment to applying globally recognized best practices in the banking industry, including International Financial Reporting Standards (IFRS), aims to enhance the safety and robustness of banks' financial positions and deepen concepts of disclosure and transparency.

Given the issuance of the final version of International Financial Reporting Standard (9) [IFRS 9] in July 2014 and the determination of the actual application date as of January 1, 2018, please provide the requirements mentioned below as the first stage of implementation of Standard (9) by banks, as follows:

First:

The implementation plan prepared by the bank, which must be clear and include specific procedures and timeframes, demonstrating the general framework for the governance of applying the standard. This should clarify the role and responsibilities of the Board of Directors and its committees, particularly the roles of the Audit and Risk Committees and the Executive Management, within one month of its date.

Second:

Providing us with a [Quantitative Impact Study] (QIS) within four months of its date. The study must be comprehensive and clarify the following:

1. The expected impact of applying the standard from a financial perspective (impact on financial statements) and from a capital adequacy perspective (impact on capital adequacy components and ratio), based on data as of 31/12/2015.
2. The volume of expected provisions resulting from the application of Standard (9) compared to the volume of provisions required under the prevailing instructions, distributed according to the items for which provisions were calculated.
3. Financial assets and liabilities that will be subject to the scope of the standard.
4. The availability of an internal credit rating system and the credit rating grades provided by the system, the Probability of Default (PD) reflected by each of those grades, in addition to the methodology for calculating Loss Given Default (LGD), leading to the calculation of Expected Credit Loss (ECL) on Exposure at Default (EAD).
5. The methodology for allocating financial instruments subject to the standard's scope for impairment calculation across the three required stages for measuring impairment, and which of those instruments will have impairment calculated on an Individual Basis or on a Collective Basis, along with the methodology for periodic review of those instruments and the specifications that must be available for instruments listed in each of the three stages.

Third:

The impacts that may result from applying the standard and their reflection on the Bank's [Business Model], particularly regarding the bank's product pricing policy and instruments it deals with, within one month of providing the requirement in Item Second above.

It should be noted that the Central Bank's plan in the subsequent stage, in light of the results shown by the Impact Study (QIS) and the stages banks have reached regarding the application of Standard (9), is to communicate with banks and their external auditors to formulate the final implementation instructions.

In this context, we point out the existence of guidelines issued by the Basel Committee under the document titled [Guidance on Credit Risk and Accounting for Expected Credit Losses], which included a set of principles regarding credit risk and the calculation and recording of expected credit losses, requiring consideration of what was stated in this document.

Please accept our highest respect,

The Governor
Dr. Ziad Friez

Copy: Banks' External Auditors.

--- info@cbj.gov.jo : Email • www.cbj.gov.jo : Website • Fax: 4638634, 4638888 • Phone: 301-463 • Jordan, Amman 11118 • P.O. Box 37

(09/01/09) Form