This book examines the effect of Covid-19 on loan loss provisions (LLPs) and earnings management of European banks. Specifically, the author analyzes how the high flexibility offered by prudential authorities and standard setters in the context of Covid-19 affects banks’ use of discretion when accounting for loan loss provisions. She finds that during Covid-19 banks use discretionary LLPs to a greater extent than before Covid-19. This trend is more evident for banks located in countries that have implemented strong containment measures as a response to the Covid-19 pandemic. Moreover, while banks tend to overstate LLPs at the beginning of the pandemic, they do, on average, understate them during 2021. Finally, examining the direction of earnings management the author finds that during Covid-19 banks use upward earnings management, whereas before Covid-19 they engage in downward earnings management.
Author(s): Merjona Lamaj
Series: BestMasters
Publisher: Springer Gabler
Year: 2023
Language: English
Pages: 68
City: Wiesbaden
Foreword
Abstract
Contents
Abbreviations
List of Figures
List of Tables
1 Introduction
2 IFRS 9 and the Expected Credit Loss Model
2.1 Why Do Banks Account for Credit Losses?
2.2 ``Too little, too late'' Provisioning and the Transition to the ECL Model
2.3 The Main Differences Between IFRS 9 and IAS 39
2.4 The ECL-Model Under IFRS 9
2.4.1 The Measurement of Expected Credit Losses
2.4.2 Three Stages of Credit Risk
2.4.3 Determining the Significant Increase in Credit Risk (SICR)
2.5 Main Implications of the ECL Model
3 Covid-19 and European Banks
3.1 Covid-19 at a Glance
3.2 Economic Consequences of the Pandemic
3.3 Covid-19 Implications on Loan Loss Provisions Under IFRS 9
3.3.1 Concerns Over Procyclicality
3.3.2 The Use of Flexibility
3.3.3 No Mechanistic Approach
3.3.4 Short Versus Long Term Forecasts
3.3.5 Transparency and Disclosure
3.4 Banks' Provisioning Practices During the Pandemic
4 Hypothesis Development
4.1 Banks' Incentives to Manage Earnings
4.2 Earnings Management Under IFRS 9
4.3 Covid-19 Effect on Income Smoothing
5 Descriptive Statistics
5.1 Data and Sample
5.2 Descriptive Statistics
6 Research Design and Results
6.1 Discretionary LLPs
6.2 Income Smoothing
6.3 Cross-country Differences
6.4 Upwards and Downwards Earnings Management
7 Conclusion
A Bibliography
