The Impact of New Financial Instruments Standard on Asset Impairment Provisioning Behavior of Commercial Banks

Abstract

This paper examines whether the mandatory adoption of China’s revised Accounting Standards for Business Enterprises No. 22 —the domestic counterpart to International Financial Reporting Standard 9 (IFRS 9)—altered the asset impairment provisioning behavior of A-share listed commercial banks. Utilizing an unbalanced panel dataset comprising 35 banks over the period from 2015 to 2025, which yields a total of 385 bank-year observations, we estimate comprehensive fixed-effects regression models. In these models, the core explanatory variable is a post-adoption binary indicator designed to capture the regulatory shift. Our empirical results demonstrate that the regulatory transition itself did not independently alter provisioning intensity once bank-level control variables are adequately included in the specification. Instead, the dominant driver of loan loss provisions remains pre-provision profitability. This finding is highly consistent with systematic income smoothing practices, facilitated by the discretionary space inherently afforded by the expected credit loss model introduced under the new standard. These robust findings survive the introduction of two-way fixed effects, addressing potential endogeneity concerns. Ultimately, the study suggests that while CAS 22 expanded managerial discretion in financial reporting, it did not displace the underlying economic incentives that govern how that discretion is practically exercised by bank management. These insights provide valuable implications for regulators and policymakers aiming to enhance the transparency and stability of the financial sector.