Impacts of the implementation of the expected credit loss model on reserves in the Portuguese banking sector

Miguel Resende (), Carla Carvalho and Cecília Carmo
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Miguel Resende: University of Aveiro
Carla Carvalho: University of Aveiro
Cecília Carmo: University of Aveiro

Journal of Banking Regulation, 2025, vol. 26, issue 3, No 16, 579-589

Abstract: Abstract This study aims to analyze the increase in loan loss allowances (LLAs) with the implementation of the expected credit loss (ECL) model under IFRS 9 and the volatility in their recognition compared to the incurred credit loss (ICL) model. This study is important for regulators and professionals in the Portuguese financial sector, as the results suggest that the reserves constituted by Portuguese banks may not be adequate to absorb unexpected losses or face economic downturns, highlighting the need to assess the adequacy of the constituted reserves. The methodology was based on a theoretical model to estimate LLAs under the ECL and ICL models over a ten-year period (2013–2022). To assess the volatility of LLAs, real data for the same period were used. The research stands out by considering an extended temporal period and analyzing a specific jurisdiction not previously studied, such as Portugal. The innovative methodological approach, based on an estimated model to compare the ECL and ICL models, provides a robust and consistent analysis of LLAs over time. The results indicate that LLAs increased with the implementation of the ECL model in Portuguese banks. However, there was no increase in the volatility of LLAs recognition.

Keywords: Loan loss allowances; Expected credit loss; IFRS 9; IAS 39; Volatility; Loan loss provisions (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41261-025-00278-x

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