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Banks’ Credit Losses and Provisioning over the Business Cycle: Implications for IFRS

Author

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  • Malovaná Simona

    (Czech National Bank, Czech Republic)

  • Tesařová Žaneta

    (Faculty of Finance and Accounting, Prague University of Economics and Business and Czech National Bank, Czech Republic)

Abstract

This article examines the procyclicality of banks’ credit losses and provisions in the Czech Republic using pre-2018 data and then discusses the implications of the findings for provisioning in stage 3 under IFRS 9. This analysis is possible because the majority of banks seem to have aligned their accounting definitions of default with the regulatory definition before the implementation of IFRS 9. Based on our results, we find significant asymmetries in the Czech banks’ behaviour over the cycle. Firstly, provisioning procyclicality is the strongest in the later contractionary phase and the early recovery phase, while it is non-existent in the early contractionary phase. Secondly, banks with higher credit risk behave more procyclically than their peers with lower credit risk. If this behaviour persists under IFRS 9 and banks do not change their provisioning behaviour from backward to forward-looking, it may lead to a delayed transfer of exposures between stages and aggravate cyclical fluctuations.

Suggested Citation

  • Malovaná Simona & Tesařová Žaneta, 2022. "Banks’ Credit Losses and Provisioning over the Business Cycle: Implications for IFRS," Review of Economic Perspectives, Sciendo, vol. 22(1), pages 53-74, March.
    • Handle: RePEc:vrs:reoecp:v:22:y:2022:i:1:p:53-74:n:1
    DOI: 10.2478/revecp-2022-0003
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    More about this item

    Keywords

    Credit losses; IFRS 9; procyclicality; provisions;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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