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The cyclicality in SICR: mortgage modelling under IFRS 9

Author

Listed:
  • Gaffney, Edward
  • McCann, Fergal

Abstract

Banks must make forward-looking provisions for loan losses under new international accounting standards introduced in 2018. In Europe, banks will assign performing exposures to a new “Stage 2” category with a higher provisioning penalty, if they have experienced significant increase in credit risk (SICR). We use a loan-level credit risk model and Irish residential mortgage panel data to assign performing loans into the appropriate stage. Using this technique, we characterise approximately 30 per cent of the performing Irish mortgage portfolio at end-2015 as Stage 2.We then calculate backward-looking, static estimations of Stage 2 mortgages between 2008 and 2015. This exercise suggests that loan stage assignment can be highly pro-cyclical. The share of Stage 2 among performing mortgages rises during the economic downturn to peak in 2013, after which large transitions are assigned from Stage 2 into lower-risk performing loans, as the economy improves. JEL Classification: G21

Suggested Citation

  • Gaffney, Edward & McCann, Fergal, 2019. "The cyclicality in SICR: mortgage modelling under IFRS 9," ESRB Working Paper Series 92, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:201992
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    References listed on IDEAS

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    Cited by:

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    2. Mahmoud Fatouh & Simone Giansante, 2023. "The cyclicality of bank credit losses and capital ratios under expected loss model," Annals of Operations Research, Springer, vol. 330(1), pages 807-840, November.
    3. Morell, Joe & Rice, Jonathan & Shaw, Frances, 2022. "A Framework for Macroprudential Stress Testing," Research Technical Papers 7/RT/22, Central Bank of Ireland.
    4. 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).
    5. Germán López‐Espinosa & Gaizka Ormazabal & Yuki Sakasai, 2021. "Switching from Incurred to Expected Loan Loss Provisioning: Early Evidence," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 59(3), pages 757-804, June.
    6. Emil Ślązak & Magdalena Skwarzec, 2022. "The effects of IFRS 9 valuation model on cost of risk in commercial banks – the impact of COVID-19," Bank i Kredyt, Narodowy Bank Polski, vol. 53(1), pages 47-78.
    7. Morais, Bernardo & Ormazabal, Gaizka & Peydro, J.L. & Roa, Monica & Sarmiento Paipilla, Miguel, 2020. "Forward Looking Loan Provisions : Credit Supply and Risk-Taking," Other publications TiSEM fe99a48f-f94a-41d8-bf3f-3, Tilburg University, School of Economics and Management.
    8. Omar Chafik & Mohammed Mikou & Yassine Slaoui & Tomas Motl, 2022. "A DSGE model for macroprudential policy in Morocco," Document de travail 2022-3, Bank Al-Maghrib, Département de la Recherche.

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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