Arbeitspapier
Limitations of implementing an expected credit loss model
The loan impairment rules recently introduced by IFRS 9 require banks to estimate their future credit losses by using forward-looking information. We use supervisory loan-level data from Germany to investigate how banks apply their reporting discretion and adjust their lending upon the announcement of the new rules. Our identification strategy exploits a cut-off for the level of provisions at the investment grade threshold based on banks' internal rating of a borrower. We find that banks required to adopt the new rules assign better internal ratings to exactly the same borrowers compared to banks that do not apply IFRS 9 around this cut-off. This pattern is consistent with a strategic use of the increased reporting discretion that is inherent to rules requiring forward-looking loss estimation. At the same time, banks also reduce their lending exposure to exactly those borrowers at the highest risk of experiencing a rating downgrade below the cutoff. These loans would be associated with additional provisions in future periods, both in the intensive and extensive margin. The lending change thus mitigates some of the negative effects of increased reporting opportunism on banks' crisis resilience. However, when these firms with internal ratings around the investment grade cut-off obtain less external funding through banks, the introduction of IFRS 9 will likely also be associated with real economic effects.
- Language
-
Englisch
- Bibliographic citation
-
Series: LawFin Working Paper ; No. 48
- Classification
-
Wirtschaft
Financial Crises
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Financial Institutions and Services: Government Policy and Regulation
Regulated Industries and Administrative Law
Accounting
- Subject
-
Bank Accounting
CECL
Expected credit losses
IFRS 9
Impairments
Loans
- Event
-
Geistige Schöpfung
- (who)
-
Bischof, Jannis
Haselmann, Rainer
Kohl, Frederik
Schlueter, Oliver
- Event
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Veröffentlichung
- (who)
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Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin)
- (where)
-
Frankfurt a. M.
- (when)
-
2022
- Handle
- Last update
-
10.03.2025, 11:41 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Bischof, Jannis
- Haselmann, Rainer
- Kohl, Frederik
- Schlueter, Oliver
- Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin)
Time of origin
- 2022
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