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Processing forward-looking loan loss provisions: evidence from the adoption of the CECL model

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Listed:
  • Daniel Dejuan-Bitria

    (Banco de España)

Abstract

This paper examines the impact of the Current Expected Credit Loss (CECL) model on the efficiency with which equity investors process banks’ earnings announcements. A potential concern with CECL is that it increases the complexity of loan loss provisions. I examine whether this added complexity impairs investors’ ability to efficiently process earnings announcements. Using a difference-in-differences methodology, I find that CECL reduces investors’ processing efficiency during banks’ earnings announcements. The effect is stronger when provisions are driven by the origination of new loans. This finding is consistent with the idea that CECL introduces a timing mismatch between loss and revenue recognition—provisions for expected losses are recognized at loan origination while interest income accrues over the life of the loan—making it harder for investors to interpret the valuation implications of provisions. Collectively, my results show that equity investors face higher processing costs when interpreting banks’ earnings announcements under CECL.

Suggested Citation

  • Daniel Dejuan-Bitria, 2026. "Processing forward-looking loan loss provisions: evidence from the adoption of the CECL model," Working Papers 2617, Banco de España.
    • Handle: RePEc:bde:wpaper:2617e
    DOI: https://doi.org/10.53479/43426
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    References listed on IDEAS

    as
    1. Beatty, Anne & Liao, Scott, 2014. "Financial accounting in the banking industry: A review of the empirical literature," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 339-383.
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G2 - Financial Economics - - Financial Institutions and Services

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