Expected Loss Model and the Cyclicality of Bank Credit Losses and Capital Ratios

Purpose – The purpose of this paper is to investigate how the design of loan officer reward systems affects bank credit losses caused by commercial clients. Design/methodology/approach – This paper uses an agent-based model to investigate how the design of reward systems affects bank credit losses. Two different systems are compared: competitive and a cooperative. The model is designed according to the theoretically derived assumption that a cooperative reward system will make agents more likely to share knowledge with each other in the processes of granting and monitoring credit. Findings – The results show that a cooperative reward system have potential to reduce bank credit losses. The reduction of errors in evaluating company’s probability of default thus mitigates variations induced by variations in industry, region, and firm-specific returns. Practical implications – The findings imply that reward system design should be considered in credit risk management. Further, managerial issues (e.g. reward systems) should be considered in risk modeling. Originality/value – The results presented in this paper provide evidence to the value of considering the downside (e.g. loss) when designing reward systems in banks.

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Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan

The American Economic Review ◽

10.1257/0002828054825691 ◽

2005 ◽

Vol 95 (4) ◽

pp. 1144-1166 ◽

Cited By ~ 316

Author(s):

Joe Peek ◽

Eric S Rosengren

Keyword(s):

Bank Credit ◽

Balance Sheets ◽

Financial Condition ◽

Capital Ratios ◽

Perverse Incentives ◽

To Receive

We examine the misallocation of credit in Japan associated with the perverse incentives faced by banks to provide additional credit to the weakest firms. Firms are more likely to receive additional bank credit if they are in poor financial condition, because troubled Japanese banks have an incentive to allocate credit to severely impaired borrowers in order to avoid the realization of losses on their own balance sheets. This “evergreening” behavior is more prevalent among banks that have reported capital ratios close to the required minimum, and is compounded by the incentives arising from extensive corporate affiliations.

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Gevolgen van invoering IFRS 9: Europese banken onder de loep

Maandblad Voor Accountancy en Bedrijfseconomie ◽

10.5117/mab.91.24068 ◽

2017 ◽

Vol 91 (11/12) ◽

pp. 421-437 ◽

Cited By ~ 2

Author(s):

Job Huttenhuis ◽

Ralph ter Hoeven

Keyword(s):

Expected Loss ◽

Loss Model ◽

Hedge Accounting ◽

Ifrs 9

Banken dienen volgens IAS 8 zowel in hun jaarrekening als halfjaarberichten inzicht te geven in de impact van IFRS 9. Op basis van een analyse van jaarrekeningen over 2016 van 50 Europese banken komen we tot de conclusie dat in beperkte mate kwantitatieve informatie over de impact van IFRS 9 op de classificatie van financiële activa, de hoogte van voorzieningen alsmede het bankkapitaal is opgenomen. De verstrekte informatie door banken laat zien dat IFRS 9 naar verwachting leidt tot een toename van de voorzieningen, hetgeen in lijn is met de verwachting bij overgang naar een expected loss-model. Banken hebben in alle gevallen een IFRS 9-toelichting in hun jaarrekening opgenomen en zijn hierin vaak concreet over de toepassing van hedge accounting. Geen enkele bank in onze populatie heeft de keuze gemaakt IFRS 9 voor 1 januari 2018 volledig toe te passen. In de onderzochte halfjaarberichten over de eerste helft van 2017 is door meer banken concrete informatie over de impact van IFRS 9 opgenomen dan in de jaarrekeningen over 2016. De geschatte negatieve impact van IFRS 9 op voorzieningen en bankkapitaal is afgenomen, waarschijnlijk als gevolg van verbeterde economische omstandigheden per 30 juni 2017. In de halfjaarberichten 2017 wordt de impact van IFRS 9 op het bankkapitaal vaker gekwantificeerd dan de impact op de voorzieningen. Een verklaringsgrond hiervoor kan worden gevonden in het grote belang dat aan het bankkapitaal wordt toegekend alsook in de locatie van de toelichting (bestuursverslag).

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IFRS9 e le sfide di contesto

10.47473/2016ppa00032 ◽

2021 ◽

Author(s):

Giuseppe Torluccio ◽

◽

Paolo Palliola ◽

Paola Brighi ◽

Lorenzo Dal Maso ◽

...

Keyword(s):

Financial Institutions ◽

Expected Loss ◽

Economic Cycle ◽

Support Measures ◽

Historical Series ◽

Risk Parameters ◽

Credit Portfolio ◽

The Relationship ◽

Credit Losses ◽

Forward Looking

Under IFRS9, Financial Institutions are required to implement impairment frameworks to determine the expected losses on their credit portfolio taking into account the current (so called “point in time”) and the prospective (so called “forward looking”) economic cycle. The Covid-19 pandemic, which began in early 2020, has posed significant challenges for Financial Institutions in their ability to manage credit risk. Despite numerous guidelines given by regulators, estimating IFRS9 expected loss continues to be a considerable challenge. The challenge partly stems from the relationship between macro-economic scenarios and credit losses, the treatment of moratoriums inside the historical series for development and calibration of IFRS9 risk parameters, and the management of support measures defined at National and European levels (e.g. Next Generation EU) for the forward looking estimations.

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