Effects of the ECL Model on Regulatory Capital in European Banks

Abstract

The paper’s purpose was to assess whether the effects on the regulatory capital of the ECL model in European banks differs among those that adopted IRB or standardized approaches to credit risk management. The empirical tests revealed that there was a significant reduction in the level of capita buffers of European banks when the IFRS 9 was first adopted, and that this reduction was more pronounced among banks using a standardized approach to credit risk than for those that relied on an IRB approach. Further testing confirmed the premise that there was an underestimation of capital requirements in the period prior to the adoption of the ECL. The study fills a gap in literature, by evaluating the difference in the impact of adopting the ECL model on the banking system, as a function of the credit risk management approach for capital purposes. The assessment of what happened in the European banking system can be used as a guidance to other jurisdictions still in transition to the ECL model.