BCBS – Issued Paper – The procyclicality of loan loss provisions: a literature review

May 25, 2021

Overview
The introduction of expected credit loss (ECL) accounting standards have impacted the amount, the timing of loan loss provisions (LLPs) relative to previous Incurred Loss (IL) standards. Purpose of literature review to shed light on the role that credit loss accounting standards play in affecting procyclicality as viewed from the lens of a prudential policymaker.

Main Messages
It is too early to know if the new ECL models will make a difference for procyclicality. There is evidence linking less timely loss recognition practices with lower lending activity during downturns, but only limited evidence of a causal link with loan supply. Heterogeneity in the extent to which banks delayed loss recognition under IL approach. There is evidence that the discretion afforded to banks in how to interpret the IL accounting standards also affected lending activity through a transparency channel. Sets out areas where future research may help shed more light on the procyclicality of ECL standards (i.e. interplay between accounting standards and prudential requirements.)

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