IFRS-9, expected loan loss provisioning and bank liquidity creation: early evidence

Abstract

Purpose

The relevance of both microeconomic and macroeconomic factors in driving banks’ liquidity creation within a cross-country setup has been addressed in prior research. The purpose of this study is to explore whether and how the recent International Financial Reporting Standards-9 (IFRS-9) accounting standards affect this relationship.

Design/methodology/approach

The author exploits the staggered implementation of IFRS-9 across countries and use a difference-in-differences framework to tease out the causal impact.

Findings

The findings indicate that the enactment of IFRS-9 leads to an increase in asset-side liquidity creation and a decline of broadly similar magnitude in liability-side liquidity creation. As a result, total liquidity creation remains unaltered. Disaggregatedly, the evidence shows that all the key channels on the asset and liability side are instrumental in explaining this behaviour.

Originality/value

The author views this as one of the early studies in a cross-country setup to explore the interlinkage between IFRS-9 and bank liquidity creation. Since liquidity creation measure provides a comprehensive metric of liquidity supplied by banks to the market, the study seeks to inform the policy debate on the role of these recently instituted accounting standards on bank liquidity behaviour.

Citation

Ghosh, S. (2024), "IFRS-9, expected loan loss provisioning and bank liquidity creation: early evidence", Accounting Research Journal, Vol. 37 No. 4, pp. 436-452. https://doi.org/10.1108/ARJ-03-2024-0086