The Interaction of the IFRS 9 Expected Loss Approach with Supervisory Rules and Implications for Financial Stability

Accounting in Europe (Forthcoming)

55 Pages Posted: 5 Aug 2016

See all articles by Zoltán Novotny-Farkas

Zoltán Novotny-Farkas

Vienna University of Economics and Business

Date Written: June 30, 2016

Abstract

This paper examines the interaction of the IFRS 9 expected credit loss (ECL) model with supervisory rules and discusses potential implications for financial stability in the European Union. Compared to the incurred loss approach of IAS 39, the IFRS 9 ECL model incorporates earlier and larger impairment allowances and is more closely aligned with regulatory expected loss. The earlier recognition of credit losses will reduce the build-up of loss-overhangs and the overstatement of regulatory capital. In addition, extended disclosure requirements are likely to contribute to more effective market discipline. Through these channels IFRS 9 might enhance financial stability. However, due to the reliance on point-in-time estimates of the main input parameters (probability of default and loss given default) IFRS 9 ECLs will increase the volatility of regulatory capital for some banks. Furthermore, the ECL model provides significant room for managerial discretion. Bank supervisors might play an important role in the implementation of IFRS 9, but too much supervisory intervention bears the risk of introducing a prudential bias into loan loss accounting that compromises the integrity of financial reporting. Overall, the potential benefits of the standard will crucially depend on its proper and consistent application across jurisdictions.

Keywords: IFRS 9, impairment, expected loss model, bank supervision, financial stability

JEL Classification: M41, M48

Suggested Citation

Novotny-Farkas, Zoltán, The Interaction of the IFRS 9 Expected Loss Approach with Supervisory Rules and Implications for Financial Stability (June 30, 2016). Accounting in Europe (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2817983

Zoltán Novotny-Farkas (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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