Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278381 
Year of Publication: 
2023
Series/Report no.: 
ECB Working Paper No. 2792
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
IFRS 9 substantially affects the financial sector by changing the impairment methodology for credit losses. This paper analyzes the implications of the change from IAS 39 to IFRS 9 in the context of bank resilience. We shed light on two effects. First, the "cliff-effect", which refers to sudden increases in impairments. It occurred under IAS 39, as credit losses were only recognized with hindsight, and thus late and abruptly. IFRS 9 was designed to mitigate this issue through a staging approach, which gradually recognizes expected credit losses (ECL). These anticipated impairments, however, constitute a significant "front-loading", which is the second effect we investigate. The earlier recognition of losses may adversely impact bank resilience through lower capital levels. In the absence of archival data of IFRS 9 and their potential biases due to the COVID-19 pandemic, we use the European bank stress test results as a natural experiment, in which all banks are subject to the same regulations and exogenous shocks. This characteristic allows us to isolate otherwise immeasurable effects and empirically investigate, whether the conjunction of both effects constitutes a net benefit to banks' resilience. Furthermore, the vigorousness of procyclicality under IFRS 9 can be compared to IAS 39 by contrasting a hypothetical baseline and an adverse scenario.
Subjects: 
Bank Stress Test
CET1
Impairment
Procyclicality
JEL: 
E58
G21
G28
M41
M48
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-5988-9
Document Type: 
Working Paper

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