TY  - UNPD
A1  - Bischof, Jannis
A1  - Haselmann, Rainer
A1  - Kohl, Frederik
A1  - Schlueter, Oliver
T1  - Limitations of implementing an expected credit loss model
N2  - The loan impairment rules recently introduced by IFRS 9 require banks to estimate their future credit losses by using forward-looking information. We use supervisory loan-level data from Germany to investigate how banks apply their reporting discretion and adjust their lending upon the announcement of the new rules. Our identification strategy exploits a cut-off for the level of provisions at the investment grade threshold based on banks’ internal rating of a borrower. We find that banks required to adopt the new rules assign better internal ratings to exactly the same borrowers compared to banks that do not apply IFRS 9 around this cut-off. This pattern is consistent with a strategic use of the increased reporting discretion that is inherent to rules requiring forward-looking loss estimation. At the same time, banks also reduce their lending exposure to exactly those borrowers at the highest risk of experiencing a rating downgrade below the cutoff. These loans would be associated with additional provisions in future periods, both in the intensive and extensive margin. The lending change thus mitigates some of the negative effects of increased reporting opportunism on banks’ crisis resilience. However, when these firms with internal ratings around the investment grade cut-off obtain less external funding through banks, the introduction of IFRS 9 will likely also be associated with real economic effects
T3  - LawFin Working Paper - No. 48 
KW  - Bank Accounting
KW  - CECL
KW  - Expected credit losses
KW  - IFRS 9
KW  - Impairments
KW  - Loans
Y1  - 2022
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/68209
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-682098
UR  - https://ssrn.com/abstract=4325220
N1  - The paper also benefited significantly from Jannis Bischof’s visit as a research fellow at the Center for Advanced Studies on the Foundations of Law and Finance at Goethe University, funded by the German Research Foundation (DFG) under the project FOR 2774.
PB  - Center for Advanced Studies on the Foundations of Law and Finance, House of Finance, Goethe University
CY  - Frankfurt am Main
ER  -