The impact of loan loss provisioning on bank capital requirements

Krüger, Steffen; Rösch, Daniel; Scheule, Harald

doi:10.1016/j.jfs.2018.02.009

Cited by 71 publications

(42 citation statements)

References 32 publications

(26 reference statements)

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“…This concern regarding the pro‐cyclical effect of fair value is confirmed by Abad and Suárez (2017) and by Krüger et al. (2018). Additionally, McSweeney questions the effectiveness of interventions.…”

Section: Literature and Previous Crisismentioning

confidence: 74%

Prudential Application of IFRS 9: (Un)Fair Reporting in COVID‐19 Crisis for Banks Worldwide?!

Barnoussi

Howieson

Beest

2020

Australian Accounting Review

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IFRS 9 and ASC 326 were developed after the 2008–2009 financial crisis, and both accounting standards include an expected loss model as a means of providing for credit losses. As a result of the COVID‐19 worldwide pandemic, however, banks face considerable uncertainty about the potential scale of the bad debts for which they will need to provide. Banks need to reassess their loan assets, by updating their risk models with expectations about potential default rates and future macro‐economic and financial developments. However, we see several interventions worldwide. The European Securities and Markets Authority addresses a position paper on the prudential application of IFRS 9. The Coronavirus Aid, Relief, and Economic Security Act in the US has given banks an optional deferral of implementation of the CECL model until 31 December 2020. This paper addresses the challenges banks face when applying the expected losses model during the current crisis. More importantly, it discusses the impact of supervisor and regulators’ intervention on future financial reporting comparability, transparency and whether there is a level playing field.

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Section: Literature and Previous Crisismentioning

confidence: 74%

Prudential Application of IFRS 9: (Un)Fair Reporting in COVID‐19 Crisis for Banks Worldwide?!

Barnoussi

Howieson

Beest

2020

Australian Accounting Review

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“…As early simulations showed a significant negative effect of the January 1, 2018, transition to IFRS 9 on banks' equity (e.g. Abad & Suarez, 2017;Kr€ uger, R€ osch, & Scheule, 2018), the Basel Committee on Banking Supervision (2017) and the European Commission (2016) became fearful of its negative impact on bank capitalization. Consequently, Regulation (EU) 2017/2395 on transitional arrangements for mitigating the impact on own funds was adopted.…”

Section: Introductionmentioning

confidence: 99%

IFRS 9 transition effect on equity in a post bank recovery environment: the case of Slovenia

Groff

Mörec

2020

Economic Research-Ekonomska Istraživanja

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On January 1, 2018, IFRS 9 became effective in the EU. It introduced the expected credit loss model to allow for timely recognition of credit losses, estimated not only on the actual credit loss experience but also on forward looking information related to current loan portfolio. Although the transition to IFRS 9 should lead to increased impairments and decrease in banks' equity, this effect is ambiguous in the settings characterised by combined effects of optimistic macroeconomic outlook and strong regulatory intervention related to extensive loan portfolio restructuring. This paper investigates day-one transition effect of IFRS 9 on level of loan impairments and total equity of banks in Slovenia, Eurozone country, which barely averted international bailout in 2013 by extensive state assisted bank restructuring. The comparative analysis is done on banks that transferred deteriorated loan portfolio to the state's Bank Assets Management Company and all other banks. In line with expectations we find that banks without extensive asset portfolio improvements recognised additional loan impairments on transition to IFRS 9, whereas the opposite effect is observed for banks which performed state-assisted loan portfolio restructuring. Our study provides additional insight on the effect of institutional and regulatory setting on IFRS 9 implementation effects.

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“…Under Basel III, there is also a provision for a higher capital surcharge on systematically important banks . Examples of research papers based on the Basel III reforms can for instance be the works of DeYoung et al, Hong et al, Krüger et al, and Kiema and Jokivuolle …”

Section: Introductionmentioning

confidence: 99%

A multiperiod model for estimating the cost of deposit insurance under the Basel III minimum capital requirement

Muller

2020

Math Methods in App Sciences

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Communicated by: M. RasmussenUnder the Basel III regime, a commercial bank is considered adequately capitalized if it maintains a ratio of capital to total risk-weighted assets or capital adequacy ratio (CAR) of at least 8%. We model a commercial bank that complies with Basel III's minimum capital requirement on an interval [0, T] for T > 0. The bank model is achieved via a specific rate of capital influx that fixes the bank's CAR at the minimum prescribed level of 8%. On the basis of this capital influx rate, we derive models for the bank's asset portfolio and capital dynamics required for maintaining the CAR at the minimum prescribed level. For the aforementioned bank, we further study a deposit insurance (DI) pricing problem with a coverage horizon equal to T years. More specifically, we employ a multiperiod DI pricing model to approximate the cost of DI for the bank on the interval [0, T], where the constant (minimum) CAR is maintained. We study the behaviours of the models leading to the constant (minimum) CAR, and the behaviour of the DI premium estimate by means of numerical simulations. In the simulation study pertaining to the DI premium estimate specifically, we determine the effects of changes in the bank's initial leverage level (deposit-to-asset ratio), the DI coverage horizon, and the volatility of the asset portfolio on the DI premium estimate.

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The impact of loan loss provisioning on bank capital requirements

Cited by 71 publications

References 32 publications

Prudential Application of IFRS 9: (Un)Fair Reporting in COVID‐19 Crisis for Banks Worldwide?!

Prudential Application of IFRS 9: (Un)Fair Reporting in COVID‐19 Crisis for Banks Worldwide?!

IFRS 9 transition effect on equity in a post bank recovery environment: the case of Slovenia

A multiperiod model for estimating the cost of deposit insurance under the Basel III minimum capital requirement

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