Banks´ Credit Losses and Provisioning over the Business Cycle: Implications for IFRS 9

Simona Malovaná, Žaneta Tesařová

We examine the procyclicality of banks’ credit losses and provisions in the Czech Republic using pre-2018 data and then discuss the implications of the findings for provisioning in stage 3 under IFRS 9. This is possible because the majority of banks seem to have aligned their accounting definitions of default with the regulatory definition prior to the implementation of IFRS 9. We find significant asymmetries in banks’ behavior over the cycle. Firstly, provisioning procyclicality is strongest in the later contractionary phase and 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. If this behavior persists under IFRS 9, it may lead to delayed transfer of exposures between stages and exaggerate cyclical fluctuations.

JEL codes: C22, E32, G21

Keywords: Credit losses, IFRS 9, procyclicality, provisions

Issued: December 2019

Download: CNB WP No. 4/2019 (pdf, 388 kB)