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

Mahmoud Fatouh*, Robert Bock, Jamal Ouenniche

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

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 may choose 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 (Baker and Wurgler in American Economic Review 105:315–320, 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. Our results indicate that weak low-risk anomaly exists 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. Due to the weak anomaly, we find a minor “day 1” impact of IFRS 9 on the cost of funding of banks in the six countries.

Original languageEnglish
JournalJournal of Banking Regulation
Early online date30 Jan 2022
Publication statusE-pub ahead of print - 30 Jan 2022

Keywords / Materials (for Non-textual outputs)

  • asset beta
  • cost of equity
  • cost of funding
  • expected loss model
  • IFRS 9
  • leverage
  • low-risk anomaly


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