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Bank loan loss accounting and its contracting effects: the new expected loss models

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  • Begoña Giner
  • Araceli Mora

Abstract

As a result of the recent financial crisis, several key institutions urged the IASB and the FASB to re-evaluate their models for loan loss accounting and use more forward-looking information. The paper examines the principal features of the new expected loss approach, taking into account the tensions between accounting and prudential objectives with respect to credit losses. We discuss the rationales for the change introduced by IFRS 9 and explore the differences between the IASB and the FASB models. Based on the notions of accounting conservatism and earnings management, we discuss the potential consequences of the new models. While both the FASB and the IASB model are more conservative than the incurred loss approach, each portrays a different type of conservatism, whose ability to provide information will depend on the bank’s business model. We also argue that the differences in business models that prevail in different jurisdictions might help to explain the existence of two expected loss models. Besides, we identify new avenues for further research within the financial sector.

Suggested Citation

  • Begoña Giner & Araceli Mora, 2019. "Bank loan loss accounting and its contracting effects: the new expected loss models," Accounting and Business Research, Taylor & Francis Journals, vol. 49(6), pages 726-752, September.
    • Handle: RePEc:taf:acctbr:v:49:y:2019:i:6:p:726-752
    DOI: 10.1080/00014788.2019.1609898
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    Cited by:

    1. Alessandro Mechelli & Riccardo Cimini, 2021. "The effect of corporate governance and investor protection environments on the value relevance of new accounting standards: the case of IFRS 9 and IAS 39," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(4), pages 1241-1266, December.
    2. Salazar, Yadira & Merello, Paloma & Zorio-Grima, Ana, 2023. "IFRS 9, banking risk and COVID-19: Evidence from Europe," Finance Research Letters, Elsevier, vol. 56(C).
    3. Di Fabio, Costanza & Ramassa, Paola & Quagli, Alberto, 2021. "Income smoothing in European banks: The contrasting effects of monitoring mechanisms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 43(C).
    4. Johnson Kolawole OLOWOOKERE & Bolarinwa R. FERUKE, 2021. "Value Relevance Of Risk Management Disclosure Among Listed Deposit Money Banks In Nigeria," Business Excellence and Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 11(4), pages 64-79, December.

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