Measuring the Procyclicality of Impairment Accounting Regimes: A Comparison Between IFRS 9 and US GAAP

42 Pages Posted: 28 Jan 2020

See all articles by Alejandro Buesa

Alejandro Buesa

Universidad Complutense de Madrid (UCM) - Department of Fundamentals of Economic Analysis II (Quantitative Economics); Banco de España

Francisco Javier Población García

European Central Bank (ECB)

Javier Tarancón

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: January 24, 2020

Abstract

The purpose of this paper is to compare the cyclical behavior of various credit impairment accounting regimes, namely IAS 39, IFRS 9 and US GAAP. We model the impact of credit impairments on the Prot and Loss (P&L) account under all three regimes. Our results suggest that although IFRS 9 is less procyclical than the previous regulation (IAS 39), it is more procyclical than US GAAP because it merely requests to provision the expected loss of one year under Stage 1 (initial category). Instead, since US GAAP prescribes that lifetime expected losses are fully provisioned at inception, the amount of new loans originated is negatively correlated with realized losses. This leads to relatively higher (lower) provisions during the upswing (downswing) phase of the financial cycle. Nevertheless, the lower procyclicality of US GAAP seems to come at cost of a large increase in provisions.

Keywords: banking system, provisions, regulation, cyclicality

JEL Classification: G21, G28, K20

Suggested Citation

Buesa, Alejandro and Población García, Francisco Javier and Tarancón, Javier, Measuring the Procyclicality of Impairment Accounting Regimes: A Comparison Between IFRS 9 and US GAAP (January 24, 2020). Banco de Espana Working Paper No. 2003 (2020). Available at SSRN: https://ssrn.com/abstract=3526174 or http://dx.doi.org/10.2139/ssrn.3526174

Alejandro Buesa (Contact Author)

Universidad Complutense de Madrid (UCM) - Department of Fundamentals of Economic Analysis II (Quantitative Economics) ( email )

Campus of Somosaguas
Madrid
Spain

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Francisco Javier Población García

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Javier Tarancón

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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