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The dynamics of IFRS9 on the capital ratio of banks given different economic scenarios

Arendshorst, B.J. (2017) The dynamics of IFRS9 on the capital ratio of banks given different economic scenarios.

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Abstract:On the first of January 2018, IFRS9 accounting regulations are enforced, resulting in two main changes for banks: first, banks should hold provisions for credit losses it expects to incur, free of conservatism, and second, the amount of provisions is increased for loans substantially deteriorated since origination, of which the expected credit losses over the remaining lifetime should be estimated, incorporating all available information. The transition from through-the-cycle to point-in-time, best estimates and lifetime estimates for credit exposure is expected to have substantial impact on the financial statements of banks and consequently on the capital ratios. In this research, a hypothetical bank using the foundation approach with only corporate credit exposures is examined and the dynamics of IFRS9 on the capital ratios given different economic scenarios are analyzed. Input data is retrieved from public sources, like S\&P and Moody's, and estimates are made using Markov chains and Vasicek's one-factor model. It was found that the first year of the simulation and the low quality rating grades are key factors influencing the amount of required provisions. In specific cases the effects of the point-in-time and lifetime adjustments in different economic scenarios can be seen, given the hypothetical portfolio rendered in this research.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics, 86 law
Programme:Industrial Engineering and Management MSc (60029)
Link to this item:http://purl.utwente.nl/essays/74263
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