Expected Losses, Unexpected Costs?

79 Pages Posted: 23 Dec 2019

Date Written: December 2, 2019


This paper examines the real effects of banks switching to an expected credit loss (ECL) framework under IFRS 9. I identify the cross-bank variation in the ECL transition from banks’ mandatory reconciliation disclosures about the day-one impact of the accounting change. I find evidence that the ECL rules deteriorate the credit landscape for risky and opaque borrowers, i.e., small- and medium-sized enterprises (SMEs). Affected banks reduce lending to SMEs by a relative 23 percent and switch to corporate lending and non-loan assets. Consistent with a decline in credit supply—rather than in credit demand—SMEs that work with affected banks receive less funding, conditional on applying for a loan. I also observe that in their contracts with SMEs, affected banks increase interest rates and collateral requirements, while reducing loan amounts and maturities. Despite these costs, my inferences do not imply that the ECL paradigm is socially undesirable.

Keywords: banking, loan loss provisions, expected losses, IFRS 9, real effects, SMEs, regulation

JEL Classification: G21, G28, G38, M41

Suggested Citation

Ertan, Aytekin, Expected Losses, Unexpected Costs? (December 2, 2019). Available at SSRN: https://ssrn.com/abstract=3504708 or http://dx.doi.org/10.2139/ssrn.3504708

Aytekin Ertan (Contact Author)

London Business School ( email )

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Regent's Park
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United Kingdom
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