IMPLICATIONS OF THE IFRS 9 IMPAIRMENT MODEL FOR FINANCIAL STABILITY

The objective of this paper is to examine the interaction of the new model of IFRS 9 with supervisory rules. It discusses potential implications for financial stability. We assess whether the IFRS 9 expected credit loss model better reflects credit quality of financial assets and whether it reduces the pro cyclicality of loan loss allowances as compared to the IAS 39. By benchmarking the IAS 39 and IFRS 9 models, we find that the expected credit loss model of IFRS 9 includes a significantly larger set of information relevant for identifying future expected credit losses. IFRS 9 requires earlier and larger impairment allowances, which will limit the possibility of distributing, overstated profits in the form of dividends and bonuses. Above these, it will reduce the build-ups of loss overhangs and the overstatement of regulatory capital in boom periods, which in turn, will mitigate capital inadequacy concerns in a downturn. IFRS 9 can mitigate the amplifying effect of the incurred loss approach on pro cyclicality and enhance financial stability.