Adoption Effects of IFRS 9 Financial Instruments: Empirical Evidence from Nordic banks

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School of Business | Master's thesis
Degree programme
55 + 3
This study examines the implementation effects of IFRS 9 on banks’ loan loss provisioning. Loan loss provisioning arises from the credit risk faced by banks and it is an influential element in bank’s financial performance impacting its capital structure as well. Due to banks’ connection to financial stability of economies loan loss provisioning is of great interest to researchers and banking authorities alike. Therefore, the purpose of this study is to, firstly, verify whether loan loss provisioning has increased upon the adoption of IFRS 9 as expected and intended, and, secondly, to provide in-depth information on key drivers influencing loan loss provisions, particularly in cases where expectations are not met, if any. The empirical evidence provided in this study is based on data collected from 44 Nordic banks. The study was performed by analysing financial information collected from Orbis and banks’ Annual reports for the year 2018. The analysis is based on two research questions motivated by prior research and reviews. The increase in the level of provisioning is evaluated by quantitative methods and loan loss provision key drivers are assessed both by quantitative and qualitative analysis. The findings indicate that reported loan loss provisions increased for Nordic banks upon the initial implementation of IFRS 9 in the beginning of 2018, however, upon the passage of time this impact seems to have faded and instead average level of provisioning decreased during the following year. Net charge-offs signifying realized write-offs had explanatory value under the previous standard IAS 39 as expected, whereas under IFRS 9 this correlation has diminished and become insignificant. No other drivers were identified based on quantitative assessment possibly due to complex nature of loan loss provision models. Based on the qualitative review of banks’ Annual reports, banks have estimated loan loss provisions to have increased due to broader asset base covered and “Stage 2”, thus for the same reasons as proposed by prior research and in line with intentions of the standard. High level and/or valuation of collaterals was detected to be one frequent reason causing decreased level of loan loss provisions, even upon the first implementation of IFRS 9. Further, banks expect loan loss provisioning under IFRS 9 regime to be more volatile, procyclical and subject to forward-looking estimates of the management.
Thesis advisor
Jarva, Henry
Myllymäki, Emma-Riikka
IFRS 9, loan loss provisions, expected credit loss, credit risk, banking
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