A global snapshot on the cyclicality of provisions: unveiling IFRS 9’s impact

The purpose of this paper is to examine the impact of IFRS 9 on the cyclicality of bank loan loss provisions (LLPs) for a global sample of banks from both advanced economies (AEs) and emerging market and developing economies (EMDEs). Fixed effects panel regression is used for the sample of 1096 banks for the period 1998–2022. The main variable of interest is the business cycle indicator, gross domestic product growth, with LLP being the dependent variable. Controls are included for both discretionary and non-discretionary provisioning behaviour. IFRS 9 is found to mitigate the procyclicality of LLPs at the global level, in AEs and Europe, and to worsen the procyclicality of LLPs in EMDEs and Asia. The findings highlight that the level of LLP procyclicality in the absence of IFRS 9 determines whether, and to what extent, IFRS 9 mitigates or worsens LLP procyclicality, a pattern also observed at the sub-regional level. While it is known that LLPs can influence procyclicality, the current study addresses the tensions in the literature on LLP cyclicality under IFRS 9 specifically by investigating variations globally, across AEs and EMDEs, and diverse regions. The results emphasise that a one-size-fits-all approach to mitigating LLP procyclicality might not work as the impact of IFRS 9 on LLP procyclicality exhibits significant variations across diverse regions and country classification, and is also influenced by the level of LLP procyclicality that prevails in the absence of the standard.