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What is the Sustainable Level of Banks’ Credit Losses and Provisions?

Author

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  • Malovaná Simona

    (Czech National Bank)

  • Tesařová Žaneta

    (Faculty of Finance and Accounting, University of Economics, Prague and Czech National Bank)

Abstract

In this paper, we estimate the sustainable level of lifetime expected credit losses and provisions and assess the procyclicality of banks’ credit losses and provisions in the Czech Republic. Further, we discuss the implications of the results for provisioning in stage 3 under the IFRS 9. Based on the estimation results, we can identify periods of insufficient provisioning when the actual values were below the sustainable levels. Additionally, we show that credit losses and provisions behave procyclically (i.e., decrease with a rising output gap and increase with a falling output gap) while banks recognize impaired credit losses and create provisions with a delay of three to four quarters after the output gap starts shrinking. Such a delay may result in a sharp increase in lifetime expected credit losses and provisioning in response to a deterioration in economic conditions under the IFRS 9 regime.

Suggested Citation

  • Malovaná Simona & Tesařová Žaneta, 2021. "What is the Sustainable Level of Banks’ Credit Losses and Provisions?," Review of Economic Perspectives, Sciendo, vol. 21(3), pages 235-258, September.
  • Handle: RePEc:vrs:reoecp:v:21:y:2021:i:3:p:235-258:n:1
    DOI: 10.2478/revecp-2021-0011
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit losses; IFRS 9; procyclicality; provisions;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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