IAS 37 Provision Calculator
for Banking

IAS 37 Provisions in Banking

Banking and financial institutions present a unique IAS 37 provision landscape where the most significant provisions often relate to litigation, regulatory penalties, and restructuring — rather than the operational provisions typical of other industries. The critical scope distinction for banking is that credit loss provisions (loan impairment) are governed by IFRS 9, not IAS 37. IAS 37 applies to banking provisions for legal claims, regulatory penalties, restructuring costs, onerous contracts on legacy products, and tax disputes. Litigation provisions in banking can be enormous: the UK's Payment Protection Insurance (PPI) mis-selling scandal resulted in provisions exceeding £50 billion across the banking sector, demonstrating the potentially massive scale of banking IAS 37 obligations. Regulatory penalty provisions have also grown significantly since the 2008 financial crisis as regulators worldwide have imposed record fines for compliance failures.

Measurement Considerations for Banking

Banking litigation provisions present particular measurement challenges because individual claims can be very large, outcomes are binary (win or lose), and the probability assessment directly determines whether the obligation is recognised or merely disclosed. For large-scale mis-selling programmes affecting thousands of customers, the expected value method is appropriate — historical complaint volumes, uphold rates, and average redress amounts provide the statistical basis. For individual significant litigation matters, the single best estimate method applies, requiring careful legal assessment of the probability of an adverse outcome. Banks must make careful probability assessments at the 50% threshold: if the probability of losing a case is assessed at exactly 50%, IAS 37 does not require recognition because 'probable' means more likely than not (strictly greater than 50%). Banks should document the basis for probability assessments and update them at each reporting date as litigation develops.

Regulatory Context and Audit Considerations

The interaction between IAS 37 provisions and regulatory capital is significant for banking. Large provision charges reduce CET1 capital and may trigger regulatory intervention if capital ratios approach minimum thresholds. Banking regulators (ECB, PRA, BaFin) scrutinise the adequacy of provisions as part of the supervisory review process (SREP). Auditors of banking entities must consider whether management has sufficient information to assess the probability and amount of regulatory penalties, particularly in early-stage investigations where the outcome is highly uncertain. The threshold for disclosure as a contingent liability versus recognition as a provision is a matter of significant judgement in banking, often requiring input from legal counsel and compliance officers.

Worked Example: Continental European Bank NV

The bank faces a regulatory investigation into past sales practices for interest rate derivatives to SME customers. Legal counsel assesses a 70% probability of an adverse finding with potential outcomes:

Using expected value method (multiple possible outcomes): Expected provision = (30% × €0) + (45% × €8.5M) + (25% × €22M) = €0 + €3,825,000 + €5,500,000 = €9,325,000. Recognition is appropriate because the probability of outflow exceeds 50% (70% chance of adverse finding). The provision is disclosed as a regulatory matter in the notes with sensitivity analysis showing the range of possible outcomes.