Article
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Preserved in Portico This version is not peer-reviewed
Impacts of the Transition to the Expected Loss Model on the Portuguese Banking Sector
Version 1
: Received: 29 March 2024 / Approved: 29 March 2024 / Online: 29 March 2024 (14:27:17 CET)
A peer-reviewed article of this Preprint also exists.
Resende, M.; Carvalho, C.; Carmo, C. Impacts of the Transition to the Expected Loss Model on the Portuguese Banking Sector. J. Risk Financial Manag. 2024, 17, 163. Resende, M.; Carvalho, C.; Carmo, C. Impacts of the Transition to the Expected Loss Model on the Portuguese Banking Sector. J. Risk Financial Manag. 2024, 17, 163.
Abstract
This study addresses the implementation of the International Financial Reporting Standard 9 (IFRS 9) in the European Union as of January 1, 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 (Bushman & Williams, 2015; Gebhardt & Novotny-Farkas, 2011). The 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 Regulation (EU) 2017/2395 of December 12. 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.
Keywords
IFRS 9; expected credit loss; loan loss provision; loan loss allowances; day one; bank
Subject
Business, Economics and Management, Accounting and Taxation
Copyright: This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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