Loan loss provisioning gets more procyclical

I know we are expected to believe Expected Loss Loan provisioning (IFRS9 / CECL) will make the banking system less procyclical. I very much doubt that is true and expect it will, if anything, be more rather than less procyclical.

I recently flagged a note by Adrian Docherty that set out why this is likely to be so. Now I offer Tony Hughes of Moody’s Analytics who wrote a good piece here explaining why this new approach to loan loss provisions will in fact add to procyclicality. It is a quick read but worth the effort.

Tony

Author: From the Outside

After working in the Australian banking system for close to four decades, I am taking some time out to write and reflect on what I have learned. My primary area of expertise is bank capital management but this blog aims to offer a bank insider's outside perspective on banking, capital, economics, finance and risk.

3 thoughts on “Loan loss provisioning gets more procyclical”

  1. Hi Tony

    Regarding your recent post on ifrs9 and pro-cyclicality.

    Before I went on leave the stress testing team did some work to estimate the impacts of ifrs9 under stress. The expectation was that there would be no additional impact of ifrs9 under stress because what you lose in retained earnings and dta you gain in reg el deduction and lower RWA.

    As it turns out the RWA benefit is capped because the expected loss under stress for defaulted assets increased above reg el so the amount you deduct off rwa is capped at reg el. As a result the impact of ifrs9 under stress adds a few points to the capital impact.

    I doubt that I’ve explained that well but if you’re interested in exploring this more, you might want to check in with Carmen or Retha Visser about the full explanation and the mathematics. They were part way through the work when I left so I’m not sure where it finished up.

    Regards Liam

    ________________________________

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