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Experimental Evidence on the Impact of Replacing the Incurred Credit Loss Model of Bank Loan Loss Provisions with the International or US Accounting Standards Boards’ Expected Credit Loss Models

Mohamed Gomaa, Kiridaran Kanagaretnam, Stuart Mestelman () and Mohamed Shehata

Department of Economics Working Papers from McMaster University

Abstract: Our objective is to test-bed the new Expected Credit Loss (ECL) and Current Expected Credit Loss (CECL) models for bank credit loss accounting to identify the potential consequences of their implementation. In particular, whether and how ECL and CECL approaches could lead to divergence in credit loss accounting practices in the U.S. relative to the rest of the world is an unanswered question. To do this, we develop a stylized bank-loan setting in a controlled laboratory environment with eight different secured personal-loan portfolios. Fifty-six senior accounting students take the role of loan managers responsible for making annual loan-loss reserve decisions in a between-subjects design under the rules of either the ECL or CECL models. We examine the effects of mandating the ECL or CECL model in terms of their impacts on the adequacy of loan-loss reserves, the comparability and predictability of loan-loss reserves and the volatility of reported profit.

Keywords: Credit-Loss Rule Changes; Test-bedding; Adequacy of Reserves; Excess of Reserves; Accounting Comparability; Accounting Predictability (search for similar items in EconPapers)
JEL-codes: C63 C91 M48 M52 (search for similar items in EconPapers)
Pages: 112 pages
Date: 2019-09
New Economics Papers: this item is included in nep-acc, nep-ban and nep-exp
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