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The impact of loan loss provisioning on bank capital requirements

Author

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  • Krüger, Steffen
  • Rösch, Daniel
  • Scheule, Harald

Abstract

This paper shows that the revised loan loss provisioning based on the International Financial Reporting Standards (IFRS) and the US Generally Accepted Accounting Principles (GAAP) implies a reduction of Tier 1 capital. The paper finds in a counterfactual analysis that these changes are more severe (i) during economic downturns, (ii) for credit portfolios of low quality, (iii) for banks that do not tighten capital standards during downturns, and (iv) under a more comprehensive definition of significant increase in credit risk (SICR) under IFRS. The provisioning rules further increase the procyclicality of bank capital requirements. Adjustments of the SICR threshold or capital buffers are suggested as ways to mitigate a regulatory pressure that may emerges due to the reduction of regulatory capital.

Suggested Citation

  • Krüger, Steffen & Rösch, Daniel & Scheule, Harald, 2018. "The impact of loan loss provisioning on bank capital requirements," Journal of Financial Stability, Elsevier, vol. 36(C), pages 114-129.
    • Handle: RePEc:eee:finsta:v:36:y:2018:i:c:p:114-129
    DOI: 10.1016/j.jfs.2018.02.009
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    More about this item

    Keywords

    GAAP 326; IFRS 9; Lifetime expected loss; Loan loss provisioning; Regulatory capital; SICR;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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