Template-Type: ReDIF-Article 1.0

Author-Name: Gabor Szigel
Author-Workplace-Name: Deloitte Hungary
Author-Email: gszigel@deloittece.com


Title: Procyclical Effects of IFRS 9 - Illustrated by a Simulation on the Hungarian Banking System

Abstract: The impact of the IFRS 9 accounting standard on amplifying procyclical bank behaviour
has been hotly debated since the introduction of the standard. This paper contributes
to the debate by a unique simulation, in which we estimated, what the losses and
capital position of the Hungarian banking system would have been during the 2008-2013
crisis episode if at international level subsequently adopted IFRS 9 had already been
in effect at that time. Our results show that IFRS 9 would have led to the recognition
of losses, which would have been more concentrated in the beginning of this crisis episode,
(but not early enough, in the pre-crisis period). As a result, the banking system's 
aggregated capital adequacy ratio would have been more than 20 per cent (2.7 percentage
points) lower at the onset of the crisis (end of 2008) than it was in reality (9.1 per
cent rather than 11.8 per cent). This could have forced bank owners to undertake 
capital increases sooner and in larger amounts or to push their banks towards even
stronger deleveraging, i.e. towards more procyclical behaviour. Our results are in line
with the findings in the literature that the introduction of IFRS 9 increases the
procyclicality of banks' impairments in such a manner that it shifts the recognition
of impairments towards beginning of crises (but not towards pre-crisis periods!).
Although the procyclical effect of IFRS 9 demonstrated in our simulation is quite large,
this is attributable to the special depth and complexity of the 2008 crisis episode
in Hungary, which involved a sovereign crisis, a banking crisis and a credit crunch
at the same time. Thus, our results suggest that the procyclical impact of IFRS 9
can be more easily managed under 'normal' recession circumstances.

Classification-JEL: E32, E61, G21, M41, M48
Keywords: IFRS 9, actual impairment, banking supervision, macroprudential policy, procyclicality
Pages: 60-90
Volume: 20
Issue: 2
Year: 2021
File-URL: https://en-hitelintezetiszemle.mnb.hu/letoltes/fer-20-2-st3-szigel.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:finrev:v:20:y:2021:i:2:p:60-90