Impacts of the Transition to the Expected Loss Model on the Portuguese Banking Sector

Miguel Resende (), Carla Carvalho and Cecília Carmo
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Miguel Resende: GOVCOPP—Research Unit on Governance, Competitiveness and Public Policies, Higher Institute of Accounting and Administration, University of Aveiro, 3810-193 Aveiro, Portugal
Carla Carvalho: GOVCOPP—Research Unit on Governance, Competitiveness and Public Policies, Higher Institute of Accounting and Administration, University of Aveiro, 3810-193 Aveiro, Portugal
Cecília Carmo: GOVCOPP—Research Unit on Governance, Competitiveness and Public Policies, Higher Institute of Accounting and Administration, University of Aveiro, 3810-193 Aveiro, Portugal

JRFM, 2024, vol. 17, issue 4, 1-14

Abstract: This study addresses the implementation of the International Financial Reporting Standard 9 (IFRS 9) in the European Union as of 1 January 2018, replacing the International Accounting Standard 39 (IAS 39) to introduce a new model for recognizing Loan Loss Provisions (LLP), based on Expected Credit Loss (ECL). This model responds to criticisms of the former Incurred Credit Loss (ICL) system for its inability to reflect credit losses in a timely manner, potentially exacerbating the effects of financial crises. This study focuses on the effects of adopting the ECL model on the level of Loan Loss Allowances (LLA) in loans, own equity, and the Common Equity Tier 1 (CET1) ratio across 13 Portuguese commercial banks. A mean comparison test is used to evaluate scenarios before and after the application of the ECL model, highlighting the importance of regulator actions and the adequacy of loss recognition policies, including the effects of European Union. The results obtained demonstrate significant negative impacts on the net values of loans, own equity, and the CET1 ratio upon adopting the IFRS 9 ECL model due to the widespread increase in LLAs.

Keywords: IFRS 9; expected credit loss; loan loss provision; loan loss allowances; day one; bank (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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