Impact of IFRS 9 on the cost of funding of banks in Europe

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 10 January 2020

Staff Working Paper No. 851

By Mahmoud Fatouh, Robert Bock and Jamal Ouenniche

On implementation, IFRS 9 increases credit loss (impairment) charges and reduces after-tax profits of banks. This makes retained earnings and hence capital resources lower than what they would be under IAS 39. To maintain their capital ratios under IFRS 9, banks could elect to hold higher levels of equity capital. This paper uses a modified version of CAPM, which accounts for the low-risk anomaly (as suggested by Baker and Wurgler (2015)), to estimate the impact of this potential increase in capital levels on the cost of funding of banks in six European countries, the UK, Germany, France, Italy, Spain and Switzerland.

We confirm the existence of low-risk anomaly for banks' equity in the six countries, except France. The magnitude of the anomaly varies across countries, but is generally low relative to the long-run cost of equity for banks. Our results show that, on day 1, the implementation of IFRS 9 has minor impact on the cost of funding of banks in the six countries.

PDFImpact of IFRS 9 on the cost of funding of banks in Europe

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