Has IFRS 9 improved the relevance of accounting loan loss provisions for CDS pricing?
Yes, but… In 2018, banks have implemented the expected credit loss (ECL) model under International Financial Reporting Standard (IFRS) 9 to estimate loan losses, which replaces the incurred loss model under International Accounting Standard (IAS) 39. The key novelty of the ECL model is the incorporation of forward-looking information for recognizing accounting loan loss provisions (LLPs), which provides ample room for managerial discretion. The literature recognizes accounting discretion as a double-edged sword. On the one hand, it allows managers to convey private information. On the other hand, opportunistic accounting choices might degrade bank transparency. Consequently, the usefulness of accounting information…
