EXPECTED CREDIT LOSS MODEL BY IFRS 9 AND ITS POSSIBLE EARLY IMPACTS ON EUROPEAN AND TURKISH BANKING SECTOR

Abstract

ABSTRACT IFRS 9 – ²Financial Instruments², the replacement of IAS 39 – ²Financial Instruments: Recognition and Measurement² was issued by International Accounting Standards Board in July, 2014 and became mandatory on January 1, 2018. The significant change implemented in the new standard is about the “impairment” phase which is based on "Expected Credit Losses" (ECL) rather than "Incurred Credit Losses". In this study, the measurement and recognition of allowances for impairment are explained and then the expected possible qualitative and quantitative effects of this transition primarily in the European Banking Industry are analyzed and compared with Turkish Banking Industry. It is expected that, ECL application by European banks would result in on average 13%-18% increase in loss provisions and Common Equity Tier 1 (CET1) and total capital ratio decrease by on average 45-75 basis points (bps) and 35-50 bps, respectively whereas the total amount of provisions will be diminishing by 4.1% and will have 33 bps and 21 bps positive impacts on CET1 and total capital adequacy ratio on average, respectively for Turkish banks.