Switching from Incurred to Expected Loan Loss Provisioning: Early Evidence

Journal of Accounting Research, Volume 59, Issue 3 (2021)

Posted: 28 Jun 2021

See all articles by Germán López-Espinosa

Germán López-Espinosa

School of Economics - University of Navarra and IESE Business School

Gaizka Ormazabal

University of Navarra, IESE Business School; European Corporate Governance Institute (ECGI)

Yuki Sakasai

IESE Business School

Multiple version iconThere are 3 versions of this paper

Date Written: June 1, 2021

Abstract

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.

Keywords: expected credit losses; loan loss provision; bank accounting; IFRS 9; CECL

JEL Classification: G21, G38, M41

Suggested Citation

López-Espinosa, Germán and Ormazabal, Gaizka and Sakasai, Yuki, Switching from Incurred to Expected Loan Loss Provisioning: Early Evidence (June 1, 2021). Journal of Accounting Research, Volume 59, Issue 3 (2021), Available at SSRN: https://ssrn.com/abstract=3867771

Germán López-Espinosa

School of Economics - University of Navarra and IESE Business School ( email )

Navarra
Spain
+34 948425600 (Phone)
+34 948425626 (Fax)

HOME PAGE: http://https://sites.google.com/site/germanlopezespinosa/

Gaizka Ormazabal (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Yuki Sakasai

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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