The Procyclicality of Expected Credit Loss Provisions

65 Pages Posted: 17 Sep 2018

See all articles by Jorge Abad

Jorge Abad

Centre for Monetary and Financial Studies (CEMFI)

Javier Suarez

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: August 2018

Abstract

The Great Recession has pushed accounting standards for banks' loan loss provisioning to shift from an incurred loss approach to an expected credit loss approach. IFRS 9 and the incoming update of US GAAP imply a more timely recognition of credit losses but also greater responsiveness to changes in aggregate conditions, which raises procyclicality concerns. This paper develops and calibrates a recursive ratings-migration model to assess the impact of different provisioning approaches on the cyclicality of banks' profits and regulatory capital. The model is used to analyze the effectiveness of potential policy responses to the procyclicality problem.

Keywords: credit loss allowances, expected credit losses, incurred losses, procyclicality, rating migrations

JEL Classification: G21, G28, M41

Suggested Citation

Abad, Jorge and Suarez, Javier, The Procyclicality of Expected Credit Loss Provisions (August 2018). CEPR Discussion Paper No. DP13135. Available at SSRN: https://ssrn.com/abstract=3244507

Jorge Abad (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain

Javier Suarez

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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