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Does Forward-Looking Accounting Improve Bank Asset Quality?

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  • Sherif Elashmawy
  • Juha-Pekka Kallunki

Abstract

This paper examines the impact of IFRS 9 expected loan loss provisions on banks’ asset quality and income smoothing incentives. Using a sample of 349 banks across 29 European countries, we find that IFRS 9 loan loss provisions improve asset quality. This is evidenced by fewer adverse events in non-performing loans and reduced loan charge-offs. Our results indicate that IFRS 9 provisions enhance the role of loan loss provisions as early indicators of future asset quality deterioration by mitigating increases in future non-performing loans. Additionally, IFRS 9 provisions do not significantly increase management’s income smoothing activities. Furthermore, our findings suggest that IFRS 9 enhances the predictive validity of provisions by reducing the gap between expected and actual losses.

Suggested Citation

  • Sherif Elashmawy & Juha-Pekka Kallunki, 2026. "Does Forward-Looking Accounting Improve Bank Asset Quality?," Accounting in Europe, Taylor & Francis Journals, vol. 23(1), pages 57-86, January.
    • Handle: RePEc:taf:acceur:v:23:y:2026:i:1:p:57-86
    DOI: 10.1080/17449480.2025.2470719
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