The Governance and Disclosure of IFRS 9 Economic Scenarios

Extraordinary economic conditions during the COVID-19 pandemic caused many IFRS 9 impairment models to produce unreliable results. Severe market reactions, resulting from unprecedented events, prompted swift action from the regulatory authorities to maintain the financial system's stability. Banks managed the uncertainty and volatility in the models with expert overlays, increasing the risk of biased outcomes. This study examines new ways of enhancing the governance and transparency of the IFRS 9 economic scenarios within banks and suggests additional financial disclosures. Benchmarking is proposed as a useful tool to evaluate the IFRS 9 economic scenarios and ensure effective challenge as part of a model risk governance framework. Archimedean copulas are used to generate objective economic benchmarks. Ideas around benchmarking are illustrated for a set of South African economic variables, and the outcomes are compared to the IFRS 9 scenarios published by the six biggest South African banks in their annual financial statements during the pandemic.

Graduation hypothesis: does government social spending follow the pattern of fiscal response?

This paper provides evidence for the cyclical behaviour of public social spending in 65 industrial and developing countries during 1980-2010. In view of the recent economic crisis, we pay particular attention to whether government spending in the social sector has followed the pattern of fiscal response: whether the developing world could escape the procyclicality trap and behave countercyclically. The estimates based on correlation and panel regression analysis show that developing countries were able to graduate from procyclical to countercyclical social spending. The study further examines the factors that affect the way social spending is conducted in these countries. Given the current pandemic situation, it is believed that developing countries could address the health crisis by undertaking comprehensive reform programs to slow the spread of the pandemic and alleviate the economic damage.

Procyclicality of loan-loss provisions and competitive environment - a global perspective

Purpose Despite the extensive debate on the impact of bank competition on risk-taking, there is no evidence of its role in procyclicality of loan-loss provisions (LLPs). The purpose of this study is to find out what is the role of competition in the procyclicality of LLPs. Design/methodology/approach Using over 70,000 bank-level observations in 103 countries in 2004-2015 and the LLPs model, this study interacts competition with business cycle to check what is the effect of competition on procyclicality of LLPs. Findings This study finds that intense competition is associated with more procyclicality of LLPs. Increased procyclicality of LLPs in a more competitive environment is binding for high-income countries. The opposite effect is shown for low-income countries. Research limitations/implications Future research can be extended by testing the role of additional factors - such as regulations, supervision or institutional protection of shareholders' rights, in the association between procyclicality and competition. Practical implications The main message of this paper is that the competitive environment changes the procyclicality of LLPs. The results are important from the point of view of the COVID-19 pandemic because government interventions during lockdowns will affect competition in the banking industry and in other industries of the economy. Originality/value This paper contributes to the extant research in three dimensions. First, it shows that competition is an important factor behind procyclicality of LLPs. Second, it adds to the research on the links between competition and financial stability. Third, it shows that the link between competition and procyclicality of LLPs depends on the economic development of the country in which the banks are located.

THE POTENTIAL “PROCICLICITY” of SOME RULES to PROTECT the C.DD. WEAK CONTRACTORS and the LAW of COMPETITION in the ECONOMIC-HEALTH CRISIS

The spread of the pandemic from COVID-19 has put a strain on the market and, therefore, the rules that govern it. The confinement measures imposed in order to avoid the spread of contagion have highlighted the current inadequacy of some provisions governing contractual relationships, highlighting how their strict application in such a peculiar economic context would cause serious and significant damage to the market. Starting from these premises, the work analyzes the potential procyclicality of some rules to protect the weak contractor by placing the emphasis on the need to stimulate an emergency law that is based on less rigid regulatory approaches and more attentive to the multifarious needs of the markets. © 2021 Ibero-American Law Institute. All rights reserved.

Assessing the impact of COVID-19 induced rating downgrades on Eurobond yields in Africa

There was an outcry from policymakers over sovereign credit rating downgrades of African countries during the unprecedented COVID-19 lockdown periods. This study investigates whether sovereign downgrades during the time African countries were hit by COVID-19 had an impact on sovereign bond yields. Applying an event study analysis on the Eurobonds yields of 4 African countries that were downgraded during this period shows that there is significant evidence of excess volatility around the downgrade event and a net increase in yields within the rating event window. The results align to the view that rating agencies negatively impact macroeconomic conditions through their procyclical ratings. Hence, ratings should be regulated and controlled during crises times to avoid the procyclical impact of ratings.