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The new era of expected credit loss provisioning

Author

Listed:
  • Benjamin H Cohen
  • Gerald A. Edwards, Jr.

Abstract

Following the Great Financial Crisis, accounting standard setters have required banks and other companies to provision against loans based on expected credit losses. While the rules adopted by the two main standard-setting bodies differ, banks must in both cases provision for expected credit losses from the time a loan is originated, rather than awaiting "trigger events" signalling imminent losses. In the short term, provisions may rise but the impact on regulatory capital is expected to be limited. However, the new rules are likely to alter the behaviour of banks in credit downturns, potentially dampening procyclicality. Banks, supervisors and market participants must prepare for their respective roles in implementing the new approach and assessing its impact.

Suggested Citation

  • Benjamin H Cohen & Gerald A. Edwards, Jr., 2017. "The new era of expected credit loss provisioning," BIS Quarterly Review, Bank for International Settlements, March.
    • Handle: RePEc:bis:bisqtr:1703f
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    References listed on IDEAS

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    Cited by:

    1. Pfeifer, Lukáš & Hodula, Martin, 2021. "A profit-to-provisioning approach to setting the countercyclical capital buffer," Economic Systems, Elsevier, vol. 45(1).
    2. Claudio Borio, 2019. "New loan provisioning standards and procyclicality," Revista de Estabilidad Financiera, Banco de España, issue Spring.
    3. Ozili, Peterson K, 2023. "Bank loan loss provisioning for sustainable development: the case for a sustainable or green loan loss provisioning system," MPRA Paper 115989, University Library of Munich, Germany.
    4. Claudio Borio, 2019. "New loan provisioning standards and procyclicality," Financial Stability Review, Banco de España, issue Spring.
    5. Pérez Rodríguez, Pablo, 2021. "Accounting and auditing of credit loss estimates: The hard and the soft," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 2(2).
    6. Sehwa Kim & Seil Kim & Anya V. Kleymenova & Rongchen Li, 2023. "Current Expected Credit Losses (CECL) Standard and Banks' Information Production," Finance and Economics Discussion Series 2023-063, Board of Governors of the Federal Reserve System (U.S.).
    7. Fang Du & Diana Hancock & Alexander H. von Hafften, 2022. "Are Incurred Loss Standards Countercyclical? A Case Study Using U.S. Bank Holding Company Data," JRFM, MDPI, vol. 15(3), pages 1-30, February.
    8. Suarez, Javier & ,, 2018. "The Procyclicality of Expected Credit Loss Provisions," CEPR Discussion Papers 13135, C.E.P.R. Discussion Papers.
    9. Mojca Gornjak, 2019. "IFRS 9: Initiator of Changes in Management Accounting Processes," Management, University of Primorska, Faculty of Management Koper, vol. 14(2), pages 95-116.
    10. Mikael Juselius & Nikola Tarashev, 2020. "Forecasting expected and unexpected losses," BIS Working Papers 913, Bank for International Settlements.
    11. Péter Fáykiss & Erzsébet-Judit Rariga & Márton Zsigó, 2019. "Portfolio Cleaning of Problem Project Loans in Hungary – Experiences Related to the Systemic Risk Buffer, as a Targeted Macroprudential Instrument," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 18(3), pages 52-82.
    12. International Monetary Fund & World Bank, 2017. "Bulgaria Financial Sector Assessment Program," World Bank Publications - Reports 27535, The World Bank Group.
    13. Claudio Borio, 2019. "New loan provisioning standards and procyclicality," Financial Stability Review, Banco de España, issue Spring.
    14. Bilyana Bogdanova & Ingo Fender & Előd Takáts, 2018. "The ABCs of bank PBRs," BIS Quarterly Review, Bank for International Settlements, March.
    15. Arno Botha & Conrad Beyers & Pieter de Villiers, 2020. "The loss optimisation of loan recovery decision times using forecast cash flows," Papers 2010.05601, arXiv.org.
    16. Lukas Pfeifer & Martin Hodula, 2018. "A Profit-to-Provisioning Approach to Setting the Countercyclical Capital Buffer: The Czech Example," Working Papers 2018/5, Czech National Bank.
    17. Behn, Markus & Couaillier, Cyril, 2023. "Same same but different: credit risk provisioning under IFRS 9," Working Paper Series 2841, European Central Bank.
    18. Ofori-Sasu, Daniel & Agbloyor, Elikplimi Komla & Nsafoah, Dennis & Asongu, Simplice A., 2024. "Banking behaviour and political business cycle in Africa: The role of independent regulatory policies of the central bank," The Journal of Economic Asymmetries, Elsevier, vol. 29(C).
    19. Ghosh, Saibal, 2022. "Elections and provisioning behavior: Assessing the Indian evidence," Economic Systems, Elsevier, vol. 46(1).
    20. Krüger, Steffen & Rösch, Daniel & Scheule, Harald, 2018. "The impact of loan loss provisioning on bank capital requirements," Journal of Financial Stability, Elsevier, vol. 36(C), pages 114-129.
    21. Lucia Alessi & Brunella Bruno & Elena Carletti & Katja Neugebauer & Isabella Wolfskeil, 2021. "Cover your assets: non-performing loans and coverage ratios in Europe [Bias-corrected matching estimators for average treatment effects]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 36(108), pages 685-733.
    22. Alessi, Lucia & Bruno, Brunella & Carletti, Elena & Neugebauer, Katja, 2019. "What drives bank coverage ratios: Evidence from the euro area," Working Papers 2019-14, Joint Research Centre, European Commission.
    23. Sarah Chae & Robert F. Sarama & Cindy M. Vojtech & James Z. Wang, 2018. "The Impact of the Current Expected Credit Loss Standard (CECL) on the Timing and Comparability of Reserves," Finance and Economics Discussion Series 2018-020, Board of Governors of the Federal Reserve System (U.S.).
    24. Logan Ewanchuk & Christoph Frei, 2019. "Recent Regulation in Credit Risk Management: A Statistical Framework," Risks, MDPI, vol. 7(2), pages 1-19, April.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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