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Accounting for credit risk: are the rules setting the right incentives?


  • Gunther Gebhardt


Banks again and again surprise the public with unexpected high provisions for loan losses sometimes threatening the financial viability of individual companies or even the stability of national financial systems. The paper analyses whether the patterns of loan loss provisions are, in part, attributable to the rules of accounting for credit risk. It compares the national German rules with the related IFRS rules and identifies inconsistencies across different types of transactions in both regimes. The analysis of the accounting rules is combined with an analysis of incentives for under-provisioning and/or over-provisioning, emanating from the capital markets and from banking supervisory authorities. The conclusion is that, in particular, the IFRS accounting rules should be changed to require a more comprehensive accounting for expected losses that can be measured reliably, using information readily available in the markets.

Suggested Citation

  • Gunther Gebhardt, 2008. "Accounting for credit risk: are the rules setting the right incentives?," International Journal of Financial Services Management, Inderscience Enterprises Ltd, vol. 3(1), pages 24-44.
  • Handle: RePEc:ids:ijfsmg:v:3:y:2008:i:1:p:24-44

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    Cited by:

    1. repec:zbw:safewh:awhitepaperseriesx30 is not listed on IDEAS
    2. Stefan Hlawatsch & Sebastian Ostrowski, 2009. "Economic Loan Loss Provision and Expected Loss," FEMM Working Papers 09013, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    3. Gebhardt, G√ľnther, 2015. "Impairments of Greek government bonds under IAS 39 and IFRS 9: A Case Study," SAFE White Paper Series 30, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.
    4. Domikowsky, Christian & Bornemann, Sven & Duellmann, Klaus & Pfingsten, Andreas, 2014. "Loan loss provisioning and procyclicality: Evidence from an expected loss model," Discussion Papers 39/2014, Deutsche Bundesbank.


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