Financial reporting of European banks: benchmark study 2023

How are Expected Credit Losses of European banks impacted by increasingly common unprecedented events? In recent years, the banking sector has had to endure numerous crises, including the Covid-19 pandemic, the war in Ukraine and the subsequent global inflation. What did the 2022 annual results of the 26 largest banks in Europe indicate about the impact on Expected Credit Losses (ECL) in this unusual environment?

We have analysed the 2022 annual reports of 26 banks in 11 European countries to better understand the impact of “unprecedented events” on their Expected Credit Losses. This study is the sixth in its series and follows on from previous editions of the report since its launch in 2020.

A focus on Expected Credit Losses

The study mainly focuses on the ECL-related impacts and covers:

  • Weight of cumulative overlays in AC loans ECL allowance
  • Breakdown of changes in AC loans gross credit exposure and ECL allowance by stage
  • AC loans global coverage ratio
  • Underlying parameters of macro-economic scenarios

Read the report below to find out more.

In the following analysis, our specialist for financial instruments, Heike Hartenberger, contextualises the report for the German market:

Ongoing uncertainty regarding the future, and thus the expected cash flows, continues to be seen as a key risk. Our study shows that Expected Credit Loss models (ECL models) are being further developed to reflect multi-layered uncertainties. The number of post-model adjustments to reflect uncertainty has therefore decreased. Uncertainties are addressed, among other things, by scenario analyses in the ECL model. The valuation concept of IFRS 9 also focuses on the fact that market participants require compensation or a risk premium for bearing uncertainties. Recent years have shown that the level of risk premiums is also determined to a significant extent by interest rate levels. Rising interest rates in themselves also lead to an increase in credit risk premiums. This is already reflected in the loss allowance recognised for the financial year 2022 and the decrease in the average Amortised Cost loan coverage ratio.

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Financial reporting of European banks – benchmark study 2023
Financial reporting of European banks – benchmark study 2023