Does the Shift to the Expected Credit Loss Model Affect Bank Loan Contracting? Evidence from IFRS 9 Adoption Worldwide

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Effective January 2018, IFRS 9 sets a new accounting rule for credit impairment:
the expected credit loss (ECL) model. We find that after adopting IFRS 9, banks
tend to charge higher interest rates, they are more likely to require collateral, and
they demand more covenants in their loan contracts. These effects are more
pronounced for banks with less proactive pre-IFRS 9 loan loss provisioning and a
higher risk of credit exposure. We also find that subsequent to IFRS 9, the bank
core capital ratio and the total loan supply decrease and loan loss recognition
timeliness improves. However, we find no evidence that IFRS 9 adoption
influences borrowers’ default risk. Overall, our results suggest that the shift to the
ECL model imposes significant costs on bank lending, which are passed on, at
least partially, to borrowers.
Period24 Mar 2021
Held atDepartment of Accountancy