The Effect of IFRS 9 on the Timeliness of Loan Loss Recognition

Abstract

International Financial Reporting Standard (IFRS) 9 changes banks’ impairment accounting by replacing the incurred credit loss model with a more forward-looking expected credit loss (ECL) model. We examine whether and how the switch to ECL recognition affects the timeliness of banks’ provisioning for loan losses. Using a sample of international banks from 33 countries, we find that the shift to an ECL model significantly improves loan loss recognition timeliness (LLRT). The effect is more pronounced for banks that engage in greater risk-taking and record lower loan losses prior to the shift and for banks subject to heavier provisions for underperforming loans after it. Consistent with prior studies on the role of LLRT under the incurred credit loss regime, we find that the adoption of IFRS 9 extenuates the pro-cyclicality of bank lending and risk-taking. Finally, we find that U.S. banks, which are not subject to IFRS 9, also experience an improvement in LLRT if they have a subsidiary in an IFRS 9-adopting country. These findings offer early insight into a revolutionary change in accounting for credit losses.