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Comparability and predictive ability of loan loss allowances: The role of accounting regulation versus bank supervision

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  • Gebhardt, Günther
  • Novotny-Farkas, Zoltán

Abstract

We investigate whether and how the shift from discretionary forward-looking provisioning to the restrictive incurred loss approach under International Financial Reporting Standards (IFRS) in the European Union (EU) affects the cross-country comparability and predictive ability of loan loss allowances. Given bank supervisors' keen interest in comparable and adequate loan loss allowances, we also examine the role of supervisors in determining financial statement effects around IFRS adoption. We find that the application of the incurred loss approach has led to more comparable loan loss allowances. However, some differences persist in countries where supervisors were reluctant to enforce the incurred loss approach. Our results also suggest that the predictive ability of loan loss allowances improved following IFRS adoption. Finally, in supplemental analyses we document that increased comparability of loan loss allowances is associated with the cross-country convergence of the risk sensitivity of bank leverage indicating an improvement in the effectiveness of market discipline in the EU.

Suggested Citation

  • Gebhardt, Günther & Novotny-Farkas, Zoltán, 2018. "Comparability and predictive ability of loan loss allowances: The role of accounting regulation versus bank supervision," CFS Working Paper Series 591, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:591
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    Cited by:

    1. Peterson K. Ozili, 2020. "Does competence of central bank governors influence financial stability?," Future Business Journal, Springer, vol. 6(1), pages 1-20, December.
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    3. García Osma, Beatriz & Mora, Araceli & Porcuna-Enguix, Luis, 2019. "Prudential supervisors’ independence and income smoothing in European banks," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 156-176.
    4. Attila Háda, 2019. "Banking Supervisors Tracing the Transition to IFRS 9," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 18(4), pages 77-111.
    5. Solomon Opare & Muhammad Nurul Houqe & Tony van Zijl, 2021. "Meta‐analysis of the Impact of Adoption of IFRS on Financial Reporting Comparability, Market Liquidity, and Cost of Capital," Abacus, Accounting Foundation, University of Sydney, vol. 57(3), pages 502-556, September.

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    More about this item

    Keywords

    comparability; loan loss allowances; IFRS; bank accounting; supervisory intervention;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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