From Incurred to Expected Loss: Implications for Bank Lending

Jorge Abad (), Daisuke Ikeda and Javier Suarez
Additional contact information
Jorge Abad: Banco de España, https://www.bde.es/

Working Papers from CEMFI

Abstract: The Great Recession prompted a shift in accounting standards for banks’ loan loss provisioning from an incurred loss approach to an expected credit loss approach. This paper develops and calibrates a dynamic banking model featuring a recursive ratings-migration structure for loan credit quality to evaluate the impact of the new standards on bank performance. We quantify the implications for bank lending, including its increased sensitivity to economic conditions, and examine the trade-offs involved in using Basel III’s countercyclical capital buffer as a stabilizing policy tool.

Keywords: Loan loss provisions; 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)
Date: 2025-05
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.cemfi.es/ftp/wp/2509.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2025_2509

Access Statistics for this paper

More papers in Working Papers from CEMFI Contact information at EDIRC.
Bibliographic data for series maintained by Araceli Requerey ().