CECL: Timely Loan Loss Provisioning and Bank Regulation

dc.contributor.author Mahieux, Lucas
dc.contributor.author Sapra, Haresh
dc.contributor.author Zhang, Gaoqing
dc.date.accessioned 2020-12-01T00:49:41Z
dc.date.available 2020-12-01T00:49:41Z
dc.date.issued 2020-08-14
dc.description.abstract We investigate how provisioning models affect bank regulation. We consider an accuracy vs. timeliness trade-o¤ between two provisioning models, an incurred loss model (IL) and a current expected credit loss model (CECL). Relative to IL, CECL improves efficiency as it allows for timely intervention to curb inefficient ex post asset-substitution, despite that the early information CECL recognizes entails false alarms. However, from a real effects perspective, our analysis uncovers a potential cost of CECL: banks respond to timely intervention by originating riskier loans so that timely intervention induces timelier risk-taking. By appropriately tailoring regulatory capital to information about credit losses, the regulator can improve the efficiency of CECL. In particular, we show that regulatory capital under CECL would be looser when early estimates of credit losses are sufficiently precise and/or risk-shifting incentives are not too severe. From a policy perspective, our model therefore calls for better coordination between bank regulators and accounting standard setters.
dc.identifier.uri http://hdl.handle.net/10125/70492
dc.subject Cecl
dc.subject Expected Loss Model
dc.subject Incurred Loss Model
dc.subject Capital Requirements
dc.subject Loan Loss Provisioning
dc.subject Real Effects
dc.subject Banking Regulation
dc.title CECL: Timely Loan Loss Provisioning and Bank Regulation
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