Impact of IFRS 9 on the cost of funding of banks in Europe

Mahmoud Fatouh (), Robert Bock () and Jamal Ouenniche ()
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Mahmoud Fatouh: Bank of England and University of Essex
Robert Bock: University of Edinburgh
Jamal Ouenniche: University of Edinburgh

No 851, Bank of England working papers from Bank of England

Abstract: On implementation, IFRS 9 increases credit loss (impairment) charges and reduces after-tax profits of banks. This makes retained earnings and hence capital resources lower than what they would be under IAS 39. To maintain their capital ratios under IFRS 9, banks could elect to hold higher levels of equity capital. This paper uses a modified version of CAPM, which accounts for the low-risk anomaly (as suggested by Baker and Wurgler (2015)), to estimate the impact of this potential increase in capital levels on the cost of funding of banks in six European countries, the UK, Germany, France, Italy, Spain and Switzerland. We confirm the existence of low-risk anomaly for banks’ equity in the six countries, except France. The magnitude of the anomaly varies across countries, but is generally low relative to the long-run cost of equity for banks. Our results show that, on day 1, the implementation of IFRS 9 has minor impact on the cost of funding of banks in the six countries.

Keywords: IFRS 9; low-risk anomaly; cost of funding; cost of equity; leverage; expected loss model; asset beta (search for similar items in EconPapers)
JEL-codes: D92 G21 G28 G31 L51 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2020-01-16
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cfn and nep-eec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0851

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