Expected Losses, Unexpected Costs?

Ertan, Aytekin

doi:10.2139/ssrn.3504708

Cited by 15 publications

(11 citation statements)

References 59 publications

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“…Using a sample of international banks, López-Espinosa, Ormazabal, and Sakasai (2020) document that LLP amounts reported under the ECL model are more informative about bank risk than those reported under the ICL model. A few recent papers provide evidence consistent with the ECL model inducing an increase in provisions and a decrease in credit(Gaffney and McCann, 2019;Ertan, 2019;Löw, Schmidt, and Thiel, 2019).…”

mentioning

confidence: 78%

Forward Looking Loan Provisions: Credit Supply and Risk-Taking

et al. 2020

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We show corporate-level real, financial, and (bank) risk-taking effects associated with calculating loan provisions based on expected-rather than incurred-credit losses. For identification, we exploit unique features of a Colombian reform and supervisory, matched loan-level data. The regulatory change induces a dramatic increase in provisions. Banks tighten all new lending conditions, adversely affecting borrowing-firms, with stronger effects for risky-firms. Moreover, to minimize provisioning, more affected (less-capitalized) banks cut credit supply to risky-firms-SMEs with shorter credit history, less tangible assets or more defaulted loans-but engage in "search-for-yield" within regulatory constraints and increase portfolio concentration, thereby decreasing risk diversification.

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confidence: 78%

Forward Looking Loan Provisions: Credit Supply and Risk-Taking

et al. 2020

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“…Their results suggest that the ICL model imposes constraints that prevent banks from fully incorporating information about future losses, which is consistent with our evidence that the introduction of the ECL model increases the informativeness of reported provisions. Gaffney and McCann [2018], Ertan [2019], and Löw, Schmidt, and Thiel [2019] provide evidence consistent with the ECL model inducing an increase in provisions and a decrease in credit. Our study extends this research by examining the informational effects of the ECL model, by analyzing systemically important banks around the world (the evidence in these prior studies is restricted to European banks), and by showing that the effect of the ECL model is significantly more pronounced during economic downturns.…”

Section: Institutional Background and Prior Literaturementioning

confidence: 84%

Switching from Incurred to Expected Loan Loss Provisioning: Early Evidence

López-Espinosa

Ormazábal²,

Sakasai

2021

J of Accounting Research

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“…In contrast, the expected loss model (e.g., IFRS 9) removes this "probable" criterion. This framework, to which banks have been switching, further increases the role of managerial input by requiring that banks use their evaluations and forecasts to estimate future credit losses (Ertan 2019).…”

Section: Introductionmentioning

confidence: 99%

Credit Information Sharing and Loan Loss Recognition

Balakrishnan

Ertan

2021

The Accounting Review

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Does enhancing banks' information sets and understanding of credit risks improve loan loss recognition? We study this question using a global dataset of staggered initiations and coverage increases of public credit registries (PCRs). Mandated by national regulators, PCRs collect borrower and loan information from lenders and share it with the banks in the financial system. This setting represents a significant improvement in banks' assessment of loss events. We find that PCR initiations and coverage reforms enhance the timeliness of banks' loan loss recognition-the extent to which loan loss provisions capture subsequent nonperforming loans. The effects are greater when PCRs distribute more information and are not driven by changes in borrower quality or supervisory stringency. Overall, these inferences are consistent with improvements in banks' information sets leading to better provisioning decisions.

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Expected Losses, Unexpected Costs?

Cited by 15 publications

References 59 publications

Forward Looking Loan Provisions: Credit Supply and Risk-Taking

Forward Looking Loan Provisions: Credit Supply and Risk-Taking

Switching from Incurred to Expected Loan Loss Provisioning: Early Evidence

Credit Information Sharing and Loan Loss Recognition

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