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Still "Too Much, Too Late": Provisioning for Expected Loan Losses

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  • Roman Goncharenko

    (Central Bank of Ireland and KU Leuven)

  • Asad Rauf

    (University of Groningen)

Abstract

The new accounting standards of IFRS 9 and U.S. GAAP adopt the expected loss (EL) approach for loan loss recognition. We investigate the effect of the EL approach on bank loan supply and stability. When a bank is unable to anticipate a downturn in the business cycle, it ends up recognizing the bulk of expected losses after the arrival of a contraction. This aggravates lending procyclicality and can potentially worsen bank stability. We develop a dynamic model of a bank to quantitatively assess these effects and show that they are economically significant.

Suggested Citation

  • Roman Goncharenko & Asad Rauf, 2024. "Still "Too Much, Too Late": Provisioning for Expected Loan Losses," International Journal of Central Banking, International Journal of Central Banking, vol. 20(4), pages 415-474, October.
    • Handle: RePEc:ijc:ijcjou:y:2024:q:4:a:8
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