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IFRS 9, banking risk and COVID-19: Evidence from Europe

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  • Salazar, Yadira
  • Merello, Paloma
  • Zorio-Grima, Ana

Abstract

We explore whether the shift to the Expected Credit Loss model (ECL) helps Loan Loss Provisions (LLPs) anticipate future overall banking risk as compared to the Incurred Credit Loss model (ICL). Using a sample of European banks from 2015–2021, we find that ECL is more effective than ICL. We are pioneer to find evidence that stage 2 Loan Loss Allowance (LLA) is a good driver of future overall banking risk and that provisions moratoria due to the COVID-19 pandemic diminished the identified significant effect of LLPs and stage 2 LLA on banking risk, as expected.

Suggested Citation

  • Salazar, Yadira & Merello, Paloma & Zorio-Grima, Ana, 2023. "IFRS 9, banking risk and COVID-19: Evidence from Europe," Finance Research Letters, Elsevier, vol. 56(C).
    • Handle: RePEc:eee:finlet:v:56:y:2023:i:c:s1544612323005020
    DOI: 10.1016/j.frl.2023.104130
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    1. Miguel Resende & Carla Carvalho & Cecília Carmo, 2024. "Impacts of the Expected Credit Loss Model on Pro-Cyclicality, Earnings Management, and Equity Management in the Portuguese Banking Sector," JRFM, MDPI, vol. 17(3), pages 1-19, March.

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    More about this item

    Keywords

    Banking risk; Expected credit loss; Loan loss provision; Stages; Economic cycle;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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