Bank provision procyclicality under an expected credit loss model: discretionary behaviour and corporate governance implications

Mooneeapen, Oren

Bank provision procyclicality under an expected credit loss model: discretionary behaviour and corporate governance implications

Thesis / Dissertation

2026

Publisher

University of Cape Town

Department

Department of Finance and Tax

Faculty

Faculty of Commerce

Abstract

Economic cycles, when amplified by their interaction with the banking sector, can transform prosperity into crisis if this interaction is misunderstood and left unchecked. Notably, accounting policy choices can influence this amplification by fuelling excessive credit growth during booms and hindering banks from facilitating recovery in downturns, creating a vicious cycle of instability. In this context, the thesis examines the impact of the IFRS 9 expected credit loss model on the cyclicality of bank loan loss provisions (LLPs), the influence of discretionary behaviours on this cyclicality, and the role of corporate governance in mitigating these influences. It aims to address conflicting findings in the literature by conducting a global study that controls for common factors, providing a consistent analysis and identifying variations by economic classification and region. Fixed-effects panel regression is employed to test the hypotheses of the thesis. Data is sourced from World Bank Open Data and Refinitiv Eikon for the period from 1998 to 2022, with a preference for an extended timeframe, subject to data availability, to capture the fluctuation of LLPs over the business cycle. Analysis beyond traditional frequentist statistical significance testing is done through a more Bayesian approach to inference. The global perspective and more Bayesian approach demonstrate that the extent of LLP procyclicality without IFRS 9 determines the impact of IFRS 9 on LLP procyclicality. IFRS 9 mitigates LLP procyclicality for banks in advanced economies and Europe, while worsening it for banks in emerging and developing economies and Asia. While discretionary behaviours in LLP estimation under IFRS 9 can reduce LLP procyclicality in some contexts, they generally carry the risk of misuse for objectives unrelated to credit risk and worsen LLP procyclicality. There is no robust evidence that current corporate governance mechanisms can mitigate this misuse. This thesis argues that a one-size-fits-all approach through LLPs to reduce the amplification of the boom-and-bust cycles described by the financial instability hypothesis may be ineffective, as the impact of IFRS 9 varies by economic classification, region, and level of procyclicality without IFRS 9. A replicable, transparent, and defendable mechanism is needed to adjust LLPs based on changes in the credit environment and limit potential misuse of discretion. Corporate governance mechanisms have not adequately evolved to address the complexities of discretionary behaviours and associated agency problems under IFRS 9, underscoring the need for their review and update.

Keywords

economic cycles

banking

Reference:

Collections

PhD / Doctoral

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