Capital management and provisioning procyclicality. Evidence from the ECL adoption in the European Union banking context

Purpose – This study aims to investigate the effect of the expected credit loss (ECL) adoption under the IFRS 9 on capital management and provisioning procyclicality in the banking context. Design/methodology/approach – The sample includes 16, 740 bank-year observations from European Union (EU) countries over the 2012–2023 period. The analysis compares a treatment group affected by the ECL adoption to a control group unaffected by the ECL adoption. Findings – Results show that banks affected by the ECL adoption experience increased capital management and less procyclical provisioning. Additional analyses also show that auditor specialization and regulatory quality mitigate the effect of the ECL adoption on capital management. Research limitations/implications – As the study examines a sample of EU banks, results cannot be extensively generalized to other contexts. For this reason, further studies in the field would harvest valuable findings. Practical implications – Results reveal important insights about the ECL adoption within the EU banking context. On the one hand, it has mitigated the likelihood of recognizing “too little, too late” losses. However, on the other hand, it has enhanced opportunistic behaviours within financial reporting. Originality/value – This study provides robust empirical evidence about the effect of the ECL adoption on capital management and provisioning procyclicality using a long-time horizon of investigation. Also, it offers additional and fresh insights into the latest growing research examining the consequences of the ECL adoption within the banking sector.