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 Insights
News

US Agencies Propose Revisions to FFIEC Reports 031, 041, 051, and 101

US Agencies (FDIC, FED, and OCC) propose to extend for three years, with revision, FFIEC 031, FFIEC 041, FFIEC 051, and FFIEC 101.

February 21, 2019 WebPage Regulatory News
News

OFR Adopts Data Collection Rule on Centrally Cleared Repo Transactions

OFR adopted a final rule to establish a data collection covering centrally cleared funding transactions in the U.S. repurchase agreement (repo) market.

February 20, 2019 WebPage Regulatory News
News

FHFA Finalizes Rule on Federal Home Loan Bank Capital Requirements

FHFA published, in Federal Register, the final rule to adopt, as its own, portions of the regulations of the Federal Housing Finance Board pertaining to the capital requirements for the Federal Home Loan Banks.

February 20, 2019 WebPage Regulatory News
News

PRA Publishes PS4/19 on Loss-Absorbency Mechanism Under Solvency II

PRA published a policy statement (PS4/19) that provides feedback on responses to the consultation paper (CP27/18) on adjusting for the reduction of loss absorbency where own fund instruments are taxed on write down under Solvency II.

February 20, 2019 WebPage Regulatory News
News

SRB Publishes Framework for Performing Valuations in Resolution

The framework provides independent valuers and the general public with an indication of the expectations of SRB on the principles and methodologies for valuation reports, as set out in the legal framework.

February 19, 2019 WebPage Regulatory News
News

BIS Paper on Effect of Securities Lending on OTC Market Liquidity

BIS published a working paper that studies how securities lending affects over-the-counter market (OTC) liquidity.

February 19, 2019 WebPage Regulatory News
News

US Agencies Extend Consultation Period for the Proposed SA-CCR

US Agencies (FDIC, FED, and OCC) extended the comment period for a proposed rule to update their standards for how firms measure counterparty credit risk posed by derivative contracts.

February 18, 2019 WebPage Regulatory News
News

FED Extends Consultation Period for Stress Testing Rule

FED has published in the Federal Register a notice proposing amendments to the company run and supervisory stress test rules.

February 15, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: Third Update for February 2019

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

February 15, 2019 WebPage Regulatory News
News

SEC Proposes Rule on Risk Mitigation Techniques for Uncleared SBS

SEC proposed a rule that would require the application of specific risk-mitigation techniques to portfolios of security-based swaps (SBS) that are not submitted for clearing.

February 15, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2623