Comparability and Predictive Ability of Loan Loss Allowances – The Role of Accounting Regulation versus Bank Supervision

70 Pages Posted: 19 May 2018

See all articles by Günther Gebhardt

Günther Gebhardt

Goethe Universität Frankfurt am Main

Zoltán Novotny-Farkas

Vienna University of Economics and Business

Date Written: May 5, 2018

Abstract

We investigate whether and how the shift from discretionary forward-looking provisioning to the restrictive incurred loss approach under International Financial Reporting Standards (IFRS) in the European Union (EU) affects the cross-country comparability and predictive ability of loan loss allowances. Given bank supervisors’ keen interest in comparable and adequate loan loss allowances, we also examine the role of supervisors in determining financial statement effects around IFRS adoption. We find that the application of the incurred loss approach has led to more comparable loan loss allowances. However, some differences persist in countries where supervisors were reluctant to enforce the incurred loss approach. Our results also suggest that the predictive ability of loan loss allowances improved following IFRS adoption. Finally, in supplemental analyses we document that increased comparability of loan loss allowances is associated with the cross-country convergence of the risk sensitivity of bank leverage indicating an improvement in the effectiveness of market discipline in the EU.

Keywords: comparability, loan loss allowances, IFRS, bank accounting, supervisory intervention

JEL Classification: M41, M48, G21

Suggested Citation

Gebhardt, Günther and Novotny-Farkas, Zoltán, Comparability and Predictive Ability of Loan Loss Allowances – The Role of Accounting Regulation versus Bank Supervision (May 5, 2018). CFS Working Paper, No. 591, 2018, Available at SSRN: https://ssrn.com/abstract=3174016 or http://dx.doi.org/10.2139/ssrn.3174016

Günther Gebhardt

Goethe Universität Frankfurt am Main ( email )

Theodor-W.-Adorno-Platz 4
Hauspostfach 64
Frankfurt, 60629
Germany

HOME PAGE: http://much-magic.wiwi.uni-frankfurt.de/professoren/gebhardt/

Zoltán Novotny-Farkas (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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