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Non-performing loans at the dawn of IFRS 9: regulatory and accounting treatment of asset quality

Author

Listed:
  • David Bholat

    (Queen Mary, University of London)

  • Rosa M. Lastra

    (Queen Mary, University of London)

  • Sheri M. Markose

    (Queen Mary, University of London)

  • Andrea Miglionico

    (Queen Mary, University of London)

  • Kallol Sen

    (Queen Mary, University of London)

Abstract

Asset quality is a key indicator of sound banking. However, it is difficult for banking regulators and investors to assess it in the absence of a common, cross-border scheme to classify assets. Currently, no standard is applied universally to categorise loans, the most sizeable asset on banks’ balance sheets. As a corollary, definitions of non-performing loans (NPLs), despite recent steps towards greater harmonisation, continue to vary between jurisdictions. This paper offers a comprehensive analysis of NPLs and considers variations in the treatment of NPLs across countries, accounting regimes and firms. The paper relies on a multidisciplinary perspective and addresses legal, accounting, economic and strategic aspects of loan loss provisioning and NPLs. A harmonised approach to NPL recognition is particularly desirable, in view of the fact that IFRS 9, the new accounting standard on loan loss provisioning, will be mandatory from January 2018. IFRS 9 changes the relationship between NPLs and provisions, by relying on greater judgement to determine provisions. The potential for divergence makes the need for comparable indicators against which to assess asset quality all the greater.

Suggested Citation

  • David Bholat & Rosa M. Lastra & Sheri M. Markose & Andrea Miglionico & Kallol Sen, 2018. "Non-performing loans at the dawn of IFRS 9: regulatory and accounting treatment of asset quality," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(1), pages 33-54, January.
    • Handle: RePEc:pal:jbkreg:v:19:y:2018:i:1:d:10.1057_s41261-017-0058-8
    DOI: 10.1057/s41261-017-0058-8
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    More about this item

    Keywords

    Non-performing loans; Asset quality; IFRS 9; Impairment; Loan loss provisions; Bank capital; Data standards; Credit risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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