Limitations of implementing an expected credit loss model

Bischof, Jannis ; Haselmann, Rainer ; Kohl, Frederik ; Schlueter, Oliver

Document Type: Working paper
Year of publication: 2022
The title of a journal, publication series: Working Paper Series / TRR 266 Accounting for Transparency, SFB/Transregio 266
Volume: 124
Place of publication: Mannheim [u.a.]
Publishing house: TRR 266 Accounting for Transparency
Related URLs:
Publication language: English
Institution: Business School > ABWL u. Unternehmensrechnung (Bischof 2015-)
Subject: 330 Economics
Abstract: The IFRS 9 loan impairment rules require banks to estimate their future credit losses using forward-looking information. We use supervisory loan-level data on German banks' internal rating models to investigate how banks apply their reporting discretion and adjust their lending upon the announcement of the new rules. Our research design exploits a cutoff for the level of provisions at the investment grade threshold based on banks' internal borrower rating. We find that banks required to adopt the new rules assign better internal ratings to the same borrowers compared to banks that do not apply IFRS 9 around this cutoff. This pattern is consistent with the strategic use of the increased reporting discretion inherent to rules requiring forward-looking loss estimation. At the same time, banks also reduce their lending exposure to precisely those borrowers at the highest risk of experiencing a rating downgrade below the cutoff. The lending change thus mitigates some of the negative effects of increased reporting opportunism on banks' crisis resilience.
Additional information: auch als LawFin Working Paper No. 48 erschienen

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