Impact of IFRS 9 on the Cost of Funding of Banks in Europe

34 Pages Posted: 17 Jan 2020

See all articles by Mahmoud Fatouh

Mahmoud Fatouh

University of Essex; Bank of England

Robert Bock

University of Edinburgh

Jamal Ouenniche

University of Edinburgh

Date Written: January 10, 2020

Abstract

On implementation, IFRS 9 increases credit loss (impairment) charges and reduces after-tax profits of banks. This makes retained earnings and hence capital resources lower than what they would be under IAS 39. To maintain their capital ratios under IFRS 9, banks could elect to hold higher levels of equity capital. This paper uses a modified version of CAPM, which accounts for the low-risk anomaly (as suggested by Baker and Wurgler (2015)), to estimate the impact of this potential increase in capital levels on the cost of funding of banks in six European countries, the UK, Germany, France, Italy, Spain and Switzerland. We confirm the existence of low-risk anomaly for banks’ equity in the six countries, except France. The magnitude of the anomaly varies across countries, but is generally low relative to the long-run cost of equity for banks. Our results show that, on day 1, the implementation of IFRS 9 has minor impact on the cost of funding of banks in the six countries.

Keywords: IFRS 9, low-risk anomaly, cost of funding, cost of equity, leverage, expected loss model, asset beta

JEL Classification: D92, G21, G28, G31, L51

Suggested Citation

Fatouh, Mahmoud and Bock, Robert and Ouenniche, Jamal, Impact of IFRS 9 on the Cost of Funding of Banks in Europe (January 10, 2020). Bank of England Working Paper No. 851, January 2020. Available at SSRN: https://ssrn.com/abstract=3520669 or http://dx.doi.org/10.2139/ssrn.3520669

Mahmoud Fatouh (Contact Author)

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Robert Bock

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Jamal Ouenniche

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

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