The effect of IFRS 9 financial instruments standard on banking sector: The relationship between non-performing loan (NPL) ratios of selected banks in BIST bank index and macroeconomic variables

The global development of financial markets and increasing capital mobility have led to the need for more accurate and transparent measurement and accounting of financial instruments. However, following the 2008 global financial crisis, delays experienced by banks in recognizing credit losses revealed the inadequacy of existing accounting standards. In particular, the application of the incurred loss model allowed credit losses to be recognized only after a tangible loss had occurred, which led to delays in reflecting credit losses in financial statements. These delays caused banks to adjust their financial positions later than necessary and undermined confidence in the markets. These experiences paved the way for the development of the expected credit loss (ECL) model, which enables earlier recognition of credit losses. In this study, the innovations introduced by the International Financial Reporting Standard (IFRS) 9: Financial Instruments Standard, and the effects of the expected credit loss model are first presented. The relevant standard came into effect on January 1, 2018. In the empirical part of the study, the aim is to measure and evaluate the effects of macroeconomic variables such as inflation, exchange rate, and Gross Domestic Product (GDP) on banks' non-performing loan (NPL) ratios. For this purpose, empirical analyses were conducted using quarterly data on NPL ratios and macroeconomic variables (inflation, exchange rate, and GDP) over 54 periods (2011Q2–2024Q3) for six selected banks included in the BIST Bank Index during the 2011–2024 period. A one-way causality relationship was identified from the independent macroeconomic variables to the dependent NPL ratios both before and after the implementation of the IFRS 9 standard. In the empirical analysis, the stationarity of the time series was first examined using the Fourier ADF unit root test. Subsequently, the Fourier-Granger causality test and the Toda-Yamamoto causality test were applied to determine the causal relationships among the variables. According to the findings of the study, it was concluded that in the pre-IFRS 9 period, there was a causal relationship from inflation, exchange rate, and GDP to the NPL ratios of the selected banks. However, in the post-IFRS 9 period, no causal relationship was found from the exchange rate to NPL ratios. It is recommended that future studies consider incorporating additional macroeconomic variables into the model.