Ireland and Iceland in Crisis B: Decreasing Loan Loss Provisions in Ireland

Yale Program on Financial Stability Case Study 2014-4B-V1

10 Pages Posted: 20 Mar 2015

See all articles by Arwin G Zeissler

Arwin G Zeissler

Yale University - Yale Program on Financial Stability

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: December 1, 2014

Abstract

All public companies in the European Union, including Ireland’s major banks, were required to adopt IAS 39 for their annual accounting periods beginning on or after January 1, 2005. Under the “incurred loss” model of IAS 39, banks could set aside reserves for loan losses only when objective evidence existed that a loan was impaired, not in anticipation of future losses. As a result, Irish banks saw their aggregate reserve for bad loans drop from 1.2% of loan balances at the end of 2000 to only 0.4% by 2006-2007, just before the collapse of the banking industry caused loan losses to soar. In the aftermath of the global financial crisis, financial regulators and accounting bodies recognized the weakness of the pro-cyclical incurred loss model. As a result, they have proposed alternative “expected loss” models that allow reserves for expected losses to be built up over the life of a loan in a counter-cyclical fashion.

Keywords: Systemic Risk, Financial Crises, Financial Regulation

JEL Classification: G01, G28

Suggested Citation

Zeissler, Arwin G and Metrick, Andrew, Ireland and Iceland in Crisis B: Decreasing Loan Loss Provisions in Ireland (December 1, 2014). Yale Program on Financial Stability Case Study 2014-4B-V1. Available at SSRN: https://ssrn.com/abstract=2579077 or http://dx.doi.org/10.2139/ssrn.2579077

Arwin G Zeissler

Yale University - Yale Program on Financial Stability ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Andrew Metrick (Contact Author)

Yale School of Management ( email )

165 Whitney Avenue
New Haven, CT 06511
United States
(203)-432-3069 (Phone)

HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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