Work detail

Synergies and differences between the IFRS approach to loan loss provisioning and the Basel II approach to calculating capital requirements

Author: Mgr. Eva Schmidtová
Year: 2005 - summer
Leaders: PhDr. Soňa Pokutová - Benecká
Consultants:
Work type: Finance and Banking
Masters
Language: English
Pages: 65
Awards and prizes:
Link:
Abstract: At my diploma thesis I focused at comparison of different perspectives to loan loss provisioning, in particular on analysis of differences and potential synergies between IFRS approach to loan loss provisioning and the Basel II approach to calculating expected loan losses. Since many banks not only face the challenge of implementing Basel II requirements, but must also convert their financial reporting systems to IFRS I dealt with the question whether banks can align these two projects and used data collected for Basel II purposes also for loan impairment under IFRS. When calculating regulatory capital, bank has to compare total loans provisions with expected losses. As IFRS is an incurred loss model and Basel II is an expected loss model, it results in a shortfall (provisions are smaller than expected losses). I came to conclusion that the interpretation placed by market participants on the ‘shortfall’ (provisions are insufficient to cover expected losses) in a bank’s provisioning level is more substantial rather than the existence of gap itself. This also illustrates that regulation of capital is not possible without consistent regulation of provisions. Finally, I outlined some important economic consequences of Basel II and IFRS. I focused mainly on possible pro-cyclical effect of both capital and loan loss provisions regulations.
Downloadable: Eva Schmidtová
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