Banks' Credit Losses and Provisioning over the Business Cycle: Implications for IFRS 9

Simona Malovana and Zaneta Tesarova

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: We examine the procyclicality of banks' credit losses and provisions in the Czech Republic using pre-2018 data and then discuss the implications of the findings for provisioning in stage 3 under IFRS 9. This is possible because the majority of banks seem to have aligned their accounting definitions of default with the regulatory definition prior to the implementation of IFRS 9. We find significant asymmetries in banks' behavior over the cycle. Firstly, provisioning procyclicality is strongest in the later contractionary phase and 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. If this behavior persists under IFRS 9, it may lead to delayed transfer of exposures between stages and exaggerate 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: 2019-12
New Economics Papers: this item is included in nep-acc, nep-ban, nep-mac and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2019/4

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