Did CECL Improve Banks' Loan Loss Provisions and Earnings Quality during the COVID-19 Pandemic?
36 Pages Posted: 17 Feb 2023
Date Written: January 2023
The Current Expected Credit Loss (CECL) standard took effect in 2020 during the onset of the unprecedented global pandemic. Proponents of CECL argue that the regulation can provide timelier provisions, while others are concerned about the potential for heightened reported earnings volatility. In this paper, we investigate the impact of CECL on the accuracy of banks’ loan loss provisions and on earnings quality. We empirically document that starting in the second half of 2020, banks adopting CECL report larger reserve releases and are more likely to report negative loan loss provisions than non-adopters. Using a difference-in-difference design we find that during the first two quarters of 2020, the dispersion of analysts earnings forecasts and the level of discretionary earnings are both larger for adopting banks than for non-adopters. We interpret these as evidence of less accurate provisions and lower earnings quality which is consistent with greater accounting noise and reporting bias caused by the adoption of CECL during high economic uncertainty.
Keywords: CECL, Expected Loss Model, Loan Loss Provisioning, Banking Regulation
JEL Classification: G21, G28, M41, M48
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