<abstract xmlns="http://www.w3.org/1999/xhtml">

<p>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.</p>
</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.

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

Review of Economic Perspectives

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

{"article-title":"What is the Sustainable Level of Banks\u2019 Credit Losses and Provisions?"}

In this paper, we estimate the sustainable level of lifetime expected credit losses and provisions and assess the procyclicality of banks’ credit losses and...

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

Published Online: Sep 17, 2021

Page range: 235 - 258

Received: Dec 09, 2020

Accepted: Jun 03, 2021

DOI: https://doi.org/10.2478/revecp-2021-0011

Keywords
Credit losses, IFRS 9, procyclicality, provisions

© 2021 Simona Malovaná et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

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

Published Online: Sep 17, 2021

Page range: 235 - 258

Received: Dec 09, 2020

Accepted: Jun 03, 2021

DOI: https://doi.org/10.2478/revecp-2021-0011

KeywordsCredit losses, IFRS 9, procyclicality, provisions

© 2021 Simona Malovaná et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Keywords
Credit losses, IFRS 9, procyclicality, provisions