The Effect of the Shift to an Expected Credit Loss Model on Loan Loss Recognition Timeliness

52 Pages Posted: 5 Dec 2019 Last revised: 27 Feb 2021

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Chong Wang

The Hong Kong Polytechnic University

Feng Wu

Lingnan University

Date Written: February 27, 2021

Abstract

International Financial Reporting Standard (IFRS) 9 changes banks’ impairment accounting by replacing the incurred credit loss model with a more forward-looking expected credit loss (ECL) model. We examine whether and how the switch to ECL recognition affects the timeliness of banks’ provisioning for loan losses. Using a sample of international banks from 33 countries, we find that the shift to an ECL model significantly improves loan loss recognition timeliness (LLRT). The effect is more pronounced for banks that engage in greater risk-taking and record lower loan losses prior to the shift and for banks subject to heavier provisions for underperforming loans after it. Consistent with prior studies on the role of LLRT under the incurred credit loss regime, we find that the adoption of IFRS 9 extenuates the pro-cyclicality of bank lending and risk-taking. Finally, we find that U.S. banks, which are not subject to IFRS 9, also experience an improvement in LLRT if they have a subsidiary in an IFRS 9-adopting country. These findings offer early insight into a revolutionary change in accounting for credit losses.

Keywords: IFRS; IFRS9; Loan Loss Recognition Timeliness

JEL Classification: G21, M41

Suggested Citation

Kim, Jeong-Bon and Ng, Jeffrey and Wang, Chong and Wu, Feng, The Effect of the Shift to an Expected Credit Loss Model on Loan Loss Recognition Timeliness (February 27, 2021). Available at SSRN: https://ssrn.com/abstract=3490600 or http://dx.doi.org/10.2139/ssrn.3490600

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Chong Wang (Contact Author)

The Hong Kong Polytechnic University ( email )

Hong Kong
Hong Kong

Feng Wu

Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

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