The impact of IFRS 9 on credit risk and profitability in the European banking sector

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Abstract

The accounting standard IFRS 9 Financial Instruments of the International Financial Reporting Standards (IFRS) has introduced a new model to estimate credit loss, requiring entities to assess the credit risk associated with financial assets and recognize impairment losses based on expected credit losses (ECL), rather than the incurred credit losses (ICL) of the former IAS 39 by the International Accounting Standards Board (IASB). The adoption of IFRS 9 has led to various application issues and challenges, particularly in assessing economic conditions and specific borrower circumstances that may impact creditworthiness, resulting in a significant impact on business performance. Specifically, banks are now required to estimate the future cash flows of their borrowers and adjust their provisions, considering forward-looking information. This includes not only an analysis of company characteristics but also macroeconomic factors to assess credit losses. Given the aforementioned considerations, our study aims to investigate the adoption of IFRS 9 in the banking sector industry, focusing on the effects of the credit risk assessment model and its impact on banks’ performance. The analysis is based on a sample of European listed banks spanning the 2014–2021 period. We compare the period during which the banks adopted IFRS 9 and the ECL model with the period in which the banks used IAS 39 and the ICL model to understand the effects on the provisioning costs, non-performing loans (NPLs) and capital adequacy. In this perspective, the adoption of IFRS 9 forced European banks to make more accurate assessments of their credits and associated risks, leading to significant changes in their risk management and internal control practices, in order to reduce the impact on the performance and capital of banks.

Keywords: IFRS 9, Provisioning Costs, Non-Performing Loans, CET 1, Index of Justice

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: B26, G21, G32, G33, M41

Received: 11.08.2024
Accepted: 08.12.2024
Published online: 10.12.2024

How to cite this paper: Ricapito, F. P. (2024). The impact of IFRS 9 on credit risk and profitability in the European banking sector. Corporate Ownership & Control, 21(4), 41–48. https://doi.org/10.22495/cocv21i4art4