The New Era of Expected Credit Loss Provisioning

18 Pages Posted: 20 Mar 2017  

Benjamin H. Cohen

Bank for International Settlements (BIS)

Gerald A. Edwards Jr.

JaeBre Dynamics, LLC

Date Written: March 6, 2017

Abstract

Following the Great Financial Crisis, accounting standard setters have required banks and other companies to provision against loans based on expected credit losses. While the rules adopted by the two main standard-setting bodies differ, banks must in both cases provision for expected credit losses from the time a loan is originated, rather than awaiting "trigger events" signalling imminent losses. In the short term, provisions may rise but the impact on regulatory capital is expected to be limited. However, the new rules are likely to alter the behaviour of banks in credit downturns, potentially dampening procyclicality. Banks, supervisors and market participants must prepare for their respective roles in implementing the new approach and assessing its impact.

JEL Classification: G21, G28, M40, M48

Suggested Citation

Cohen, Benjamin H. and Edwards, Gerald A., The New Era of Expected Credit Loss Provisioning (March 6, 2017). BIS Quarterly Review, March 2017. Available at SSRN: https://ssrn.com/abstract=2931474

Benjamin H. Cohen (Contact Author)

Bank for International Settlements (BIS) ( email )

Basel
Switzerland

Gerald A. Edwards Jr.

JaeBre Dynamics, LLC ( email )

VA
United States

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