The Impact of Loan Loss Provisioning on Bank Capital Requirements

46 Pages Posted: 28 Feb 2018 Last revised: 2 Oct 2020

See all articles by Steffen Krueger

Steffen Krueger

Independent

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Date Written: February 16, 2018

Abstract

This paper shows that the revised loan loss provisioning based on the International Financial Reporting Standards (IFRS) and the US Generally Accepted Accounting Principles (GAAP) implies a reduction of Tier 1 capital. The paper finds in a counterfactual analysis that these changes are more severe (i) during economic downturns, (ii) for credit portfolios of low quality, (iii) for banks that do not tighten capital standards during downturns, and (iv) under a more lenient definition of significant increase in credit risk (SICR) under IFRS. The provisioning rules further increase the procyclicality of bank capital requirements. Adjustments of the SICR threshold or capital buffers are suggested as ways to mitigate a regulatory pressure that may emerges due to the reduction of regulatory capital.

Keywords: GAAP 326, IFRS 9, lifetime expected loss, loan loss provisioning, regulatory capital

JEL Classification: C51, G28, M48

Suggested Citation

Krueger, Steffen and Roesch, Daniel and Scheule, Harald, The Impact of Loan Loss Provisioning on Bank Capital Requirements (February 16, 2018). Journal of Financial Stability, 2018, 36, 114-129, Available at SSRN: https://ssrn.com/abstract=3124787

Daniel Roesch

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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