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Daniel Rugilo

2 March 2023
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.
JEL Code
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
M41 : Business Administration and Business Economics, Marketing, Accounting→Accounting and Auditing→Accounting
M48 : Business Administration and Business Economics, Marketing, Accounting→Accounting and Auditing→Government Policy and Regulation