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

Roman Goncharenko and Asad Rauf
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Roman Goncharenko: Central Bank of Ireland and KU Leuven
Asad Rauf: University of Groningen

International Journal of Central Banking, 2024, vol. 20, issue 4, 415-474

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.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2024:q:4:a:8

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