Loan loss provisions and income smoothing in banks

Literature review in the context of IFRS 9

Abstract

Income smoothing using loan loss provisions is a phenomenon that has been described in the literature for many years. In 2018, IFRS 9 came into force in the banking sector, which introduced a new expected loss model and was intended to reduce risk in the banking sector. This article presents the theoretical and empirical background of the income smoothing phenomenon in the banking sector. Empirical research from recent years was analyzed, which both indicates various determinants of income smoothing in banks and analyzes the potential impact of IFRS 9 on banking activities. The literature conducted allows us to draw the conclusion that the phenomenon of income smoothing using loan loss provisions is observable in the period after the introduction of IFRS 9. Moreover, thanks to the analysis carried out many years back, it is possible to draw further conclusions and plans for further research: the next step in research should be extensive empirical investigation. Since several years have passed since the introduction of IFRS 9, the data needed for the empirical study will be available in the near future.