What is the Sustainable Level of Banks’ Credit Losses and Provisions?

Simona Malovana and Tesařová Žaneta ()
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Tesařová Žaneta: Faculty of Finance and Accounting, University of Economics, Prague and Czech National Bank

Review of Economic Perspectives, 2021, vol. 21, issue 3, 235-258

Abstract: In this paper, we estimate the sustainable level of lifetime expected credit losses and provisions and assess the procyclicality of banks’ credit losses and provisions in the Czech Republic. Further, we discuss the implications of the results for provisioning in stage 3 under the IFRS 9. Based on the estimation results, we can identify periods of insufficient provisioning when the actual values were below the sustainable levels. Additionally, we show that credit losses and provisions behave procyclically (i.e., decrease with a rising output gap and increase with a falling output gap) while banks recognize impaired credit losses and create provisions with a delay of three to four quarters after the output gap starts shrinking. Such a delay may result in a sharp increase in lifetime expected credit losses and provisioning in response to a deterioration in economic conditions under the IFRS 9 regime.

Keywords: Credit losses; IFRS 9; procyclicality; provisions (search for similar items in EconPapers)
JEL-codes: C22 E32 G21 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:reoecp:v:21:y:2021:i:3:p:235-258:n:1

DOI: 10.2478/revecp-2021-0011

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