Accounting Rules Are Driving Bets Against Canadian Banks

Some of those shorting Canadian banks contend that the firms aren’t preparing adequately for higher loan losses if credit conditions worsen, Bloomberg News reported. The argument by investors including money manager Steve Eisman and PAA Research LLC’s Bradley Safalow has to do with accounting changes Canadian banks made after adopting global rules known as International Financial Reporting Standard 9 in late 2017. Previously, banks set aside money for bad loans -- also known as a provision for credit losses -- when recognizing a loss. Under IFRS 9 rules, banks provision for expected losses and divide loan books into three buckets: Stage 1 is for most performing loans, with provisions based on default expectations over the next 12 months; Stage 2 for performing loans with a significant increase in credit risk, and expectations of default based on the remaining life of the loan; and Stage 3 for impaired loans effectively written off. Read more

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