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Impacts of the Transition to the Expected Loss Model on the Portuguese Banking Sector

Author

Listed:
  • Miguel Resende

    (GOVCOPP—Research Unit on Governance, Competitiveness and Public Policies, Higher Institute of Accounting and Administration, University of Aveiro, 3810-193 Aveiro, Portugal)

  • Carla Carvalho

    (GOVCOPP—Research Unit on Governance, Competitiveness and Public Policies, Higher Institute of Accounting and Administration, University of Aveiro, 3810-193 Aveiro, Portugal)

  • Cecília Carmo

    (GOVCOPP—Research Unit on Governance, Competitiveness and Public Policies, Higher Institute of Accounting and Administration, University of Aveiro, 3810-193 Aveiro, Portugal)

Abstract

This study addresses the implementation of the International Financial Reporting Standard 9 (IFRS 9) in the European Union as of 1 January 2018, replacing the International Accounting Standard 39 (IAS 39) to introduce a new model for recognizing Loan Loss Provisions (LLP), based on Expected Credit Loss (ECL). This model responds to criticisms of the former Incurred Credit Loss (ICL) system for its inability to reflect credit losses in a timely manner, potentially exacerbating the effects of financial crises. This study focuses on the effects of adopting the ECL model on the level of Loan Loss Allowances (LLA) in loans, own equity, and the Common Equity Tier 1 (CET1) ratio across 13 Portuguese commercial banks. A mean comparison test is used to evaluate scenarios before and after the application of the ECL model, highlighting the importance of regulator actions and the adequacy of loss recognition policies, including the effects of European Union. The results obtained demonstrate significant negative impacts on the net values of loans, own equity, and the CET1 ratio upon adopting the IFRS 9 ECL model due to the widespread increase in LLAs.

Suggested Citation

  • Miguel Resende & Carla Carvalho & Cecília Carmo, 2024. "Impacts of the Transition to the Expected Loss Model on the Portuguese Banking Sector," JRFM, MDPI, vol. 17(4), pages 1-14, April.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:4:p:163-:d:1376856
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    References listed on IDEAS

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    1. Marton, Jan & Runesson, Emmeli, 2017. "The predictive ability of loan loss provisions in banks – Effects of accounting standards, enforcement and incentives," The British Accounting Review, Elsevier, vol. 49(2), pages 162-180.
    2. 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.
    3. Bikker, J.A. & Metzemakers, P.A.J., 2005. "Bank provisioning behaviour and procyclicality," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(2), pages 141-157, April.
    4. Jannis Bischof & Holger Daske, 2016. "Interpreting the European Union’s IFRS Endorsement Criteria: The Case of IFRS 9," Accounting in Europe, Taylor & Francis Journals, vol. 13(2), pages 129-168, May.
    5. José Arias & Carlos Maquieira & Mauricio Jara, 2020. "Do legal and institutional environments matter for banking system performance?," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 33(1), pages 2203-2228, January.
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