How do bank managers forecast the future in the shadow of the past? An examination of expected credit losses under IFRS 9

How do bank managers forecast the future in the shadow of the past? An examination of expected credit losses under IFRS 9

One of the most significant changes under IFRS 9 is the shift to considering and incorporating forward-looking information to forecast expected credit losses (ECL). This study aims to understand how bank managers incorporate forward-looking information, such as future economic projections, in assess...

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Bibliographic Details
Published in:Accounting and business research 2023-09, Vol.53 (6), p.699-722
Main Authors: Du, Ning, Allini, Alessandra, Maffei, Marco
Format: Article
Language:eng
Subjects:
cognitive biases
Conservatism
Credit risk
Deterioration
expected credit loss
forecast horizon
Forecasting
Good news
IFRS 9
News
Projections
Risk assessment
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Summary:One of the most significant changes under IFRS 9 is the shift to considering and incorporating forward-looking information to forecast expected credit losses (ECL). This study aims to understand how bank managers incorporate forward-looking information, such as future economic projections, in assessing significant credit risk deterioration, and how bank managers evaluate the reasonableness of different forecast horizons in order to project lifetime ECL. We conducted an experiment with 72 bank managers. Our results reveal that bank managers are reluctant to incorporate good news when historical information indicates a high default risk and potentially large credit loss, and that their ECL estimates are influenced by the upward or downward shift in the forecasted losses. We view these results as consistent with the unconditional conservatism of the new ECL model.
ISSN:0001-4788
2159-4260