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<p>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.</p>
</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.

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

Prague University of Economics and Business and Czech National Bank

Review of Economic Perspectives

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

This article examines the procyclicality of banks’ credit losses and provisions in the Czech Republic using pre-2018 data and then discusses the implications...

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

Published Online: Mar 17, 2022

Page range: 53 - 74

Received: Jun 15, 2021

Accepted: Jan 28, 2022

DOI: https://doi.org/10.2478/revecp-2022-0003

Keywords
Credit losses, IFRS 9, procyclicality, provisions

© 2022 Simona Malovaná et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

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

Published Online: Mar 17, 2022

Page range: 53 - 74

Received: Jun 15, 2021

Accepted: Jan 28, 2022

DOI: https://doi.org/10.2478/revecp-2022-0003

KeywordsCredit losses, IFRS 9, procyclicality, provisions

© 2022 Simona Malovaná et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
Credit losses, IFRS 9, procyclicality, provisions