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  • Novotny IFRS 9 Bank SupervisionFinancial Stability_SSRN

    Rights statement: This is an Accepted Manuscript of an article published by Taylor & Francis in Accounting in Europe on 11/08/2016, available online: http://www.tandfonline.com/10.1080/17449480.2016.12101080

    Accepted author manuscript, 745 KB, PDF document

    Available under license: CC BY-NC: Creative Commons Attribution-NonCommercial 4.0 International License

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The interaction of the Ifrs 9 expected loss approach with supervisory rules and implications for financial stability

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>2016
<mark>Journal</mark>Accounting in Europe
Issue number2
Volume13
Number of pages31
Pages (from-to)197-227
Publication statusPublished
Early online date11/08/16
Original languageEnglish

Abstract

This paper examines the interaction of the International Financial Reporting Standard (IFRS) 9 expected credit loss (ECL) model with supervisory rules and discusses potential implications for financial stability in the European Union. Compared to the incurred loss approach of IAS 39, the IFRS 9 ECL model incorporates earlier and larger impairment allowances and is more closely aligned with regulatory expected loss. The earlier recognition of credit losses will reduce the build-up of loss overhangs and the overstatement of regulatory capital. In addition, extended disclosure requirements are likely to contribute to more effective market discipline. Through these channels IFRS 9 might enhance financial stability. However, due to the reliance on point-in-time estimates of the main input parameters (probability of default and loss given default) IFRS 9 ECLs will increase the volatility of regulatory capital for some banks. Furthermore, the ECL model provides significant room for managerial discretion. Bank supervisors might play an important role in the implementation of IFRS 9, but too much supervisory intervention bears the risk of introducing a prudential bias into loan loss accounting that compromises the integrity of financial reporting. Overall, the potential benefits of the standard will crucially depend on its proper and consistent application across jurisdictions.

Bibliographic note

This is an Accepted Manuscript of an article published by Taylor & Francis in Accounting in Europe on 11/08/2016, available online: http://www.tandfonline.com/10.1080/17449480.2016.12101080