1. bookVolume 21 (2021): Issue 3 (September 2021)
Journal Details
License
Format
Journal
First Published
19 Feb 2010
Publication timeframe
4 times per year
Languages
English
access type Open Access

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

Published Online: 17 Sep 2021
Page range: 235 - 258
Received: 09 Dec 2020
Accepted: 03 Jun 2021
Journal Details
License
Format
Journal
First Published
19 Feb 2010
Publication timeframe
4 times per year
Languages
English
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

JEL Classification

AHMED, A., TAKEDA, C., THOMAS, S. (1999). Bank loan loss provisions: A reexamination of capital management, earnings management and signaling effects. Journal of Accounting and Economics, 28(1), 1–25. Search in Google Scholar

BCBS (2015). Guidance on credit risk and accounting for expected credit losses, Basel committee on bank supervision. Search in Google Scholar

BEATTY, A., CHAMBERLAIN, S. L., MAGLIOLO, J. (1995). Managing financial reports of commercial banks: The influence of taxes, regulatory capital, and earnings, Journal of Accounting Research, 33(2), 231–261. Search in Google Scholar

BIKKER, J., METZEMAKERS, P. (2005). Bank provisioning behaviour and procyclicality. Journal of International Financial Markets, Institutions and Money, 15(2), 141–157. Search in Google Scholar

BORIO, C. (2012). The financial cycle and macroeconomics: What have we learnt? BIS working papers no. 395, Bank for International Settlements. Search in Google Scholar

BOUVATIER, V., LEPETIT, L. (2008). Banks’ procyclical behavior: Does provisioning matter? Journal of International Financial Markets, Institutions and Money, 18(5), 513–526. Search in Google Scholar

BOUVATIER, V., LEPETIT, L. (2012). Provisioning rules and bank lending: A theoretical model. Journal of Financial Stability, 8(1), 25–31. Search in Google Scholar

BRÜDERL, J., LUDWIG V. (2014). Fixed-Effects Panel Regression. The SAGE Handbook of Regression Analysis and Causal Inference, 327–358. DOI: 10.4135/9781446288146.n15 Search in Google Scholar

CNB (2018). Financial Stability Report 2017/2018, Czech national bank. Search in Google Scholar

CNB (2019). Inflation report i/2019, Czech national bank. Search in Google Scholar

DREHMANN, M., BORIO, C., TSATSARONIS, K. (2012). Characterising the financial cycle: Don’t lose sight of the medium term!, Bis working papers no. 380, Bank for International Settlements. Search in Google Scholar

DREHMANN, M., GAMBACORTA, L. (2012). The effects of countercyclical capital buffers on bank lending, Applied Economics Letters, 19(7), 603–608. Search in Google Scholar

EBA (2017). Guidelines on credit institutions credit risk management practices and accounting for expected credit losses, European banking authority. Search in Google Scholar

EGERT, B., SUTHERLAND, D. (2014). The nature of financial and real business cycles: The great moderation and banking sector pro-cyclicality, Scottish Journal of Political Economy, Scottish Economic Society 61(1), 98–117. Search in Google Scholar

ESRB (2017). Financial Stability Implications of IFRS 9, European systemic risk board. Search in Google Scholar

ESRB (2019). The Cyclical Behaviour of the ECL Model in IFRS 9, European systemic risk board. Search in Google Scholar

EUROPEAN COMMISSION AND THE COUNCIL OF THE EUROPEAN UNION (2013a). Directive (EU) no 2013/36 (Capital Requirements Directive). Search in Google Scholar

EUROPEAN COMMISSION AND THE COUNCIL OF THE EUROPEAN UNION (2013b). Regulation (EU) no 575/2013 (Capital Requirements Regulation). Search in Google Scholar

EY (2018). IFRS 9 Expected Credit Loss: Making Sense of the Change in Numbers’, Retrieved on November 21, 2019 from https://www.ey.com/Publication/vwLUAssets/ey-ifrs-9-expected-credit-loss/$File/ey-ifrs-9-expected-credit-loss. Search in Google Scholar

FSF (2008). Addressing Financial System Procyclicality: A Possible Framework, Note for the fsf working group on market and institutional resilience, Financial Stability Forum. Search in Google Scholar

GPPC (2016). The implementation of ifrs 9 impairment requirements by banks, Considerations for those charged with governance of systemically important banks, Global Public Policy Committee of representatives of the six largest accounting networks. Search in Google Scholar

GREENAWALT, M., SINKEY, J. J. (1988). Bank loan loss provisions and the income smoothing hypothesis: An empirical analysis, 1976–1984. Journal of Financial Services Research, 1(4), 301–318. Search in Google Scholar

HASAN, I., WALL, L. (2004). Determinants of the loan loss allowance: Some cross-country comparisons. Financial Review, 39(1), 129–152. Search in Google Scholar

HUIZINGA, H., LAEVEN, L. (2019). The procyclicality of banking: Evidence from the euro area. Working paper series 2288, European Central Bank. Search in Google Scholar

KOCH, T., WALL, L. (2000). The use of accruals to manage reported earnings: Theory and evidence. Working paper series, no. 2000–23, Federal Reserve Bank of Atlanta. Search in Google Scholar

LAEVEN, L., MAJNONI, G. (2003). Loan loss provisioning and economic slowdowns: Too much, too late? Journal of Financial Intermediation, 12(2), 178–197. Search in Google Scholar

LEVENTIS, S., DIMITROPOULOS, P., ANANDARAJAN, A. (2011). Loan loss provisions, earnings management and capital management under IFRS: The case of EU commercial banks. Journal of Financial Services Research, 40(1–2), 103–122. Search in Google Scholar

NEGRO, M. D., GIANNONI, M. P., SCHORFHEIDE, F. (2015). Inflation in the great recession and new Keynesian models. American Economic Journal: Macroeconomics, American Economic Association, 7(1), 168–196. Search in Google Scholar

PAIN, D. (2003). The provisioning experience of major UK banks: A small panel investigation. Bank of England working paper, no. 177, Bank of England. Search in Google Scholar

RESTROY, F., ZAMIL, R. (2017). Prudential policy considerations under expected loss provisioning: Lessons from Asia. FSI papers no. 5, Bank for International Settlement. Search in Google Scholar

SCHOLES, M., WILSON, G., WOLFSON, M. (1990). Tax planning, regulatory capital planning, and financial reporting strategy for commercial banks. The Review of Financial Studies, 3(4), 625–650. Search in Google Scholar

SCHULARICK, M., TAYLOR, A. M. (2012). Credit booms gone bust: Monetary policy, leverage cycles, and financial crises, 1870–2008. American Economic Review, 102(2), 1029–1061. Search in Google Scholar

TOVAR, C. E. (2008). DSGE models and central banks. BIS working papers 258, Bank for International Settlements. Search in Google Scholar

TRICHET, J. C. (2010). Reflections on the nature of monetary policy non-standard measures and finance theory. Speech given on the occasion of the ECB central banking conference, Frankfurt, 18 November, European Central Bank. Search in Google Scholar

WEZEL, T., CHAN-LAU, J. A., COLUMBA, F. (2012). Dynamic loan loss provisioning: Simulations on effectiveness and guide to implementation, IMF working papers 12/110, International Monetary Fund. Search in Google Scholar

Recommended articles from Trend MD

Plan your remote conference with Sciendo