Expected Credit Losses and Regulatory Capital: Effects of IFRS 9 in European Banks

Manuela Rodrigues Boscia¹, José Alves Dantas^2, , Vitor Leone³ and Herbert Kimura⁴

¹Accounting Department, Central Bank of Brazil, Brasília, Brazil

²Accounting Department, University of Brasilia, Brasília, Brazil

³Leicester Castle Business School, De Montfort University, United Kingdom

⁴Department of Management, University of Brasilia, Brasília, Brazil

Cite this paper:
Manuela Rodrigues Boscia, José Alves Dantas, Vitor Leone and Herbert Kimura. Expected Credit Losses and Regulatory Capital: Effects of IFRS 9 in European Banks. Journal of Finance and Accounting. 2022; 10(1):49-59. doi: 10.12691/jfa-10-1-7

Abstract

The purpose of this study was to determine the effects of adopting the ECL model on the regulatory capital of European banks, especially whether the post-IFRS 9 capital behaviour pattern suggests evidence of underestimated or excessive regulatory capital requirements in the pre-IFRS 9 period. The results of the empirical tests carried out using five different metrics, confirmed that, besides a significant capital buffers’ reduction when the IFRS 9 was first adopted, there was, mostly likely, a regulatory capital underestimation in the period prior to the adoption of the ECL model, since there is evidence that efforts of capital recompositing were taken by the European banks after the implementation of the new accounting standard.

Keywords:
expected credit losses IFRS 9 regulatory capital banks loan loss provision ECL

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