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Experimental Evidence on the Impact of Replacing the Incurred Credit Loss Model of Bank Loan Loss Provisions with the International or US Accounting Standards Boards’ Expected Credit Loss Models

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  • Mohamed Gomaa
  • Kiridaran Kanagaretnam
  • Stuart Mestelman
  • Mohamed Shehata

Abstract

Our objective is to test-bed the new Expected Credit Loss (ECL) and Current Expected Credit Loss (CECL) models for bank credit loss accounting to identify the potential consequences of their implementation. In particular, whether and how ECL and CECL approaches could lead to divergence in credit loss accounting practices in the U.S. relative to the rest of the world is an unanswered question. To do this, we develop a stylized bank-loan setting in a controlled laboratory environment with eight different secured personal-loan portfolios. Fifty-six senior accounting students take the role of loan managers responsible for making annual loan-loss reserve decisions in a between-subjects design under the rules of either the ECL or CECL models. We examine the effects of mandating the ECL or CECL model in terms of their impacts on the adequacy of loan-loss reserves, the comparability and predictability of loan-loss reserves and the volatility of reported profit.

Suggested Citation

  • Mohamed Gomaa & Kiridaran Kanagaretnam & Stuart Mestelman & Mohamed Shehata, 2019. "Experimental Evidence on the Impact of Replacing the Incurred Credit Loss Model of Bank Loan Loss Provisions with the International or US Accounting Standards Boards’ Expected Credit Loss Models," Department of Economics Working Papers 2019-10, McMaster University.
    • Handle: RePEc:mcm:deptwp:2019-10
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit-Loss Rule Changes; Test-bedding; Adequacy of Reserves; Excess of Reserves; Accounting Comparability; Accounting Predictability;
    All these keywords.

    JEL classification:

    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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