Capital Management at the Dawn of IFRS 9: Were Loan Loss Provisions used to Manage Regulatory Capital in European Banks during the Transition to IFRS 9?

Sammanfattning: On January 1, 2018 IFRS 9 and the Expected Credit Loss model were mandatorily adopted by all IFRS compliant entities (IASB, 2017). Recent research has criticized the Expected Credit Loss model for increasing bank managers' discretion over loan loss provisions and noted its potential implications for financial stability (Bushman & Williams, 2012; Novotny-Farkas, 2016; Krüger et al., 2018). Previous literature has investigated the relationship between loan loss provisions and regulatory capital, finding evidence that loan loss provisions are used to inflate regulatory capital and avoid the costs associated with breaching minimum thresholds set by the regulator (Beatty & Liao, 2014). The aim of this thesis is to investigate whether loan loss provisions were used to manage regulatory capital during the transition to IFRS 9. The study is conducted on two samples of listed European banks: one panel data sample covering the years 2013-2017 and one cross-sectional sample at the transition to IFRS 9. The results provide significant evidence of capital management previous to the introduction of IFRS 9 but does not support capital management behaviour at the transition to IFRS 9. The results from this thesis contribute with new insights to academics, regulators, standard setters and analysts alike, and they provide an ample starting point for future capital management research focusing on loan loss provisions under IFRS 9.