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Switching from Incurred to Expected Loan Loss Provisioning: Early Evidence
Author(s) -
LÓPEZESPINOSA GERMÁN,
ORMAZABAL GAIZKA,
SAKASAI YUKI
Publication year - 2021
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.12354
Subject(s) - provisioning , loan , business , monetary economics , swap (finance) , stock (firearms) , sample (material) , credit default swap , credit risk , context (archaeology) , actuarial science , financial system , economics , finance , computer science , telecommunications , mechanical engineering , paleontology , chemistry , chromatography , engineering , biology
This paper provides early evidence on the effect of global regulation mandating a switch from loan loss provisioning (LLP) based on incurred credit losses (ICLs) to LLP based on expected credit losses (ECLs). Using a sample of systemically important banks from 74 countries, we find that ECL provisions are more predictive of future bank risk than ICL provisions. Corroborating that the switch to ECL provisioning results in more information to assess bank risk, we also observe that the announcement of a larger first‐time impact of the accounting change elicits lower stock returns and higher changes in credit default swap spreads. Critically, these patterns are most pronounced when credit conditions deteriorate. Additional analyses show that the higher information content of the ECL model stems from the provisions for nondefaulted loans, which did not exist under ICL. Our study contributes to the debate on the effect of the ECL model on procyclicality, an especially pressing issue in the context of the current pandemic.