Procyclical Effects of IFRS 9 - Illustrated by a Simulation on the Hungarian Banking System

Gabor Szigel ()
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Gabor Szigel: Deloitte Hungary

Financial and Economic Review, 2021, vol. 20, issue 2, 60-90

Abstract: The impact of the IFRS 9 accounting standard on amplifying procyclical bank behaviour has been hotly debated since the introduction of the standard. This paper contributes to the debate by a unique simulation, in which we estimated, what the losses and capital position of the Hungarian banking system would have been during the 2008-2013 crisis episode if at international level subsequently adopted IFRS 9 had already been in effect at that time. Our results show that IFRS 9 would have led to the recognition of losses, which would have been more concentrated in the beginning of this crisis episode, (but not early enough, in the pre-crisis period). As a result, the banking system's aggregated capital adequacy ratio would have been more than 20 per cent (2.7 percentage points) lower at the onset of the crisis (end of 2008) than it was in reality (9.1 per cent rather than 11.8 per cent). This could have forced bank owners to undertake capital increases sooner and in larger amounts or to push their banks towards even stronger deleveraging, i.e. towards more procyclical behaviour. Our results are in line with the findings in the literature that the introduction of IFRS 9 increases the procyclicality of banks' impairments in such a manner that it shifts the recognition of impairments towards beginning of crises (but not towards pre-crisis periods!). Although the procyclical effect of IFRS 9 demonstrated in our simulation is quite large, this is attributable to the special depth and complexity of the 2008 crisis episode in Hungary, which involved a sovereign crisis, a banking crisis and a credit crunch at the same time. Thus, our results suggest that the procyclical impact of IFRS 9 can be more easily managed under 'normal' recession circumstances.

Keywords: IFRS 9; actual impairment; banking supervision; macroprudential policy; procyclicality (search for similar items in EconPapers)
JEL-codes: E32 E61 G21 M41 M48 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:mnb:finrev:v:20:y:2021:i:2:p:60-90

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