Accounting vs. Prudential Disclosure

This thesis analyses the effectiveness of regulatory measures in regard to non-performing exposures through the relationship of accounting provisions and regulatory provisioning requirements of European banks. Additionally, the first observable effects of the Prudential Backstop are analysed. First, the accounting and regulatory frameworks are presented with their respective terminology and methods. After that, the analysis is conducted with data from the EBA-transparency exercises from 2019 to 2021. The results show that further reduction of IRB-Shortfall has been achieved for almost all institutes, while larger institutes, institutes from higher NPL countries and institutes with retail and corporate focussed business models being affected the most in terms of alignment of accounting provisions and regulatory provisioning needs. The Prudential Backstop so far exhibits only extremely limited effects, as most exposures are not yet affected. So far larger institutes, institutes with retail business models and institutes from higher NPL countries are affected the most.

Simon Tietz, RUBIQ Consulting GmbH & Co. KG, formerly: Deutsche Bundesbank (German Central Bank), Frankfurt, Germany

Prof. Dr. Andreas Igl, University of Applied Sciences of Deutsche Bundesbank (German Central Bank), Hachenburg and Frankfurt, Germany.

The paper describes the personal opinion of the authors and not necessarily the official position of the German Central Bank

Table of content

List of abbreviations

List of tables

List of figures

List of equations

1 Introduction

2 Theoretical framework
2.1 Accounting framework - IFRS 9
2.1.1 ASSET VALUATION, PROVISIONING AND IMPAIRMENT
2.1.2 SPECIFICATIONS OF THE EXPECTED CREDIT LOSS MODEL
2.1.3 EFFECT OF PROFITABILITY ON PROVISIONS AND USE OF PROVISIONS
2.2 Regulatory framework – CRR
2.2.1 DEFINITIONS OF KEY TERMINOLOGY
2.2.2 REGULATORY PROVISIONING UNDER THE IRB-APPROACH
2.3 Accounting framework vs. regulatory framework
2.3.1 IRB-SHORTFALL/ IRB-EXCESS (ART. 159 CRR)
2.3.2 PRUDENTIAL BACKSTOP (ART. 36 (1)(M), 47C CRR
2.4 Overview of frameworks and terminology

3 Analysis of European Banks
3.1 Development of research questions
3.2 Description of the data set
3.3 Analysis of IRB-Shortfall and IRB-Excess
3.3.1 CLASSIFICATION BY SIZE
3.3.2 CLASSIFICATION BY BUSINESS MODELS
3.3.3 CLASSIFICATION BY COUNTRY NPL GROUPS
3.3.4 SUMMARY OF RESULTS
3.4 Analysis of Prudential Backstop
3.4.1 CLASSIFICATION BY SIZE
3.4.2 CLASSIFICATION BY BUSINESS MODEL
3.4.3 CLASSIFICATION BY COUNTRY NPL GROUP
3.4.4 SUMMARY OF RESULTS

4 Conclusion

Bibliography

Appendix