Banks’ Credit Losses and Provisioning over the Business Cycle: Implications for IFRS

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

Review of Economic Perspectives, 2022, vol. 22, issue 1, 53-74

Abstract: This article examines the procyclicality of banks’ credit losses and provisions in the Czech Republic using pre-2018 data and then discusses the implications of the findings for provisioning in stage 3 under IFRS 9. This analysis is possible because the majority of banks seem to have aligned their accounting definitions of default with the regulatory definition before the implementation of IFRS 9. Based on our results, we find significant asymmetries in the Czech banks’ behaviour over the cycle. Firstly, provisioning procyclicality is the strongest in the later contractionary phase and the early recovery phase, while it is non-existent in the early contractionary phase. Secondly, banks with higher credit risk behave more procyclically than their peers with lower credit risk. If this behaviour persists under IFRS 9 and banks do not change their provisioning behaviour from backward to forward-looking, it may lead to a delayed transfer of exposures between stages and aggravate cyclical fluctuations.

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: 2022
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https://doi.org/10.2478/revecp-2022-0003 (text/html)

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Working Paper: Banks' Credit Losses and Provisioning over the Business Cycle: Implications for IFRS 9 (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:reoecp:v:22:y:2022:i:1:p:53-74:n:1

DOI: 10.2478/revecp-2022-0003

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