Did Loan-Loss Provisioning by UK Banks Become More Timely or Less Timely after Adoption of IAS 39?

Abstract

From 2005, IAS 39: Financial Instruments: Recognition and Measurement required UK banks to support loan-loss provisioning with objective evidence that losses had been incurred, and thereby eliminated general loan-loss provisioning. It has been argued that the IAS 39 incurred-loss method of loan-loss provisioning delayed the recognition of loan losses by UK banks, and that this caused particular problems by delaying loss recognition until the onset of the financial and banking crisis of the late 2000s. By examining the relationship in time between loan write offs and loan-loss expense for 37 UK banks, this paper provides evidence on whether loan-loss provisioning by UK banks was more timely or less timely in years immediately following the introduction of IAS 39 than it had been previously. Overall, the evidence suggests that provisioning becoming more timely after the introduction of IAS 39, although the effect is only statistically significant for the subset of banks with a stock market quotation during the interval examined. Furthermore, there is no evidence that provisioning became less timely immediately prior to the financial and banking crisis of the late 2000s or that the general-provision element of the pre-IAS 39 loan-loss expense was more timely than the corresponding specific-provision element.