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

Roman Goncharenko*, Asad Rauf

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

The new accounting standards of IFRS 9 and US 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.
Original languageEnglish
JournalInternational Journal of Central Banking
DOIs
Publication statusAccepted/In press - 2024

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