General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
January 16, 2019

ESRB published a report that examines the financial stability implications of differences between the expected credit loss approaches of EU and U.S. The report emphasizes that the extent to which the EU's expected credit loss (ECL) and the United States' current expected credit loss (CECL) models can anticipate a downturn is crucial for achieving their intended objectives. The report discusses the different features of the two standards and their intended and unintended consequences, along with the different business models and banking structures in Europe and in the United States.

The report argues that the ECL approach in IFRS 9 more accurately reflects the evolution of credit risk, as it follows the evolution of credit risk over time (with the importance attached to the concept of “significant increase in credit risk”) and limits the “double-counting” of expected credit losses at the initial recognition of a loan, which are already reflected in the interest rate applied (under the assumption that the price for credit risk is adequately set). However, the three-stage approach and the related requirements may introduce a certain degree of complexity in its practical application. CECL approach of the U.S., on the other hand, requires lifetime estimations of credit losses throughout the life of a loan and could be found to favor the practical implementation by reporting entities, even if it disregards the economic link between the pricing of a loan and its credit quality.

Furthermore, in terms of cyclical behavior, the existing limited academic studies show that the CECL approach may lead to higher impairment charges in normal times, while the ECL approach would have a larger impact at the onset of the crisis. Overall, the report concludes that the extent to which the differences between ECL and CECL approaches can impact financial stability by inducing changes in lending conditions is unknown at present.


Related Link: Report (PDF)

Keywords: Europe, EU, US, Banking, CECL, ECL, IFRS 9, Financial Stability, ESRB

Related Articles

FDIC Consults on Approach to Resolution Planning for IDIs

FDIC approved an Advance Notice of Proposed Rulemaking (ANPR) and is seeking comment on ways to tailor and improve its rule requiring certain insured depository institutions (IDIs) to submit resolution plans.

April 22, 2019 WebPage Regulatory News

HKMA Decides to Maintain Countercyclical Capital Buffer at 2.5%

HKMA announced that, in accordance with the Banking (Capital) Rules, the countercyclical capital buffer (CCyB) ratio for Hong Kong remains at 2.5%.

April 16, 2019 WebPage Regulatory News

EP Approves Agreement on Package of CRD 5, CRR 2, BRRD 2, and SRMR 2

The European Parliament (EP) approved the final agreement on a package of reforms proposed by EC to strengthen the resilience and resolvability of European banks.

April 16, 2019 WebPage Regulatory News

EP Resolution on Proposal for Sovereign Bond Backed Securities

The European Parliament (EP) published adopted text on the proposal for a regulation of the European Parliament and of the Council on sovereign bond-backed securities (SBBS).

April 16, 2019 WebPage Regulatory News

PRA Seeks Input and Issues Specifications for Insurance Stress Tests

PRA announced that it will conduct an insurance stress test for the largest regulated life and general insurers from July to September 2019.

April 15, 2019 WebPage Regulatory News

PRA Finalizes Policy on Approach to Managing Climate Change Risks

PRA published the policy statement PS11/19, which contains final supervisory statement (SS3/19) on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change (Appendix).

April 15, 2019 WebPage Regulatory News

EBA Single Rulebook Q&A: First Update for April 2019

EBA published answers to nine questions under the Single Rulebook question and answer (Q&A) updates for this week.

April 12, 2019 WebPage Regulatory News

EIOPA Statement on Application of Proportionality in SCR Supervision

EIOPA published a supervisory statement on the application of proportionality principle in the supervision of the Solvency Capital Requirement (SCR) calculated in accordance with the standard formula.

April 11, 2019 WebPage Regulatory News

FED Updates Form and Supplemental Instructions for FR Y-9C Reporting

FED updated the form and supplemental instructions for FR Y-9C reporting. FR Y-9C is used to collect data from domestic bank holding companies, savings and loan holding companies, U.S intermediate holding companies, and securities holding companies with total consolidated assets of USD 3 billion or more.

April 11, 2019 WebPage Regulatory News

OSFI Finalizes Guidelines on Liquidity Adequacy and NSFR Disclosures

OSFI published the final Liquidity Adequacy Requirements (LAR) guideline and the net stable funding ratio (NSFR) disclosure requirements guideline.

April 11, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2929