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The Procyclicality of Expected Credit Loss Provisions

Jorge Abad () and Javier Suarez

Working Papers from CEMFI

Abstract: The Great Recession has pushed accounting standards for banks' loan loss provisioning to shift from an incurred loss approach to an expected credit loss approach. IFRS 9 and the incoming update of US GAAP imply a more timely recognition of credit losses but also greater responsiveness to changes in aggregate conditions, which raises procyclicality concerns. This paper develops and calibrates a recursive ratings-migration model to assess the impact of different provisioning approaches on the cyclicality of banks' profits and regulatory capital. The model is used to analyze the effectiveness of potential policy responses to the procyclicality problem.

Keywords: Credit loss allowances; expected credit losses; incurred losses; rating migrations; procyclicality. (search for similar items in EconPapers)
JEL-codes: G21 G28 M41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc and nep-ban
Date: 2018-08
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