Did CECL Improve Banks' Loan Loss Provisions and Earnings Quality during the COVID-19 Pandemic?

36 Pages Posted: 17 Feb 2023

See all articles by Pietro Bonaldi

Pietro Bonaldi

Carnegie Mellon University

Pierre Jinghong Liang

Tepper School of Business, Carnegie Mellon University

Lavender Yang

Carnegie Mellon University

Date Written: January 2023

Abstract

The Current Expected Credit Loss (CECL) standard took effect in 2020 during the onset of the unprecedented global pandemic. Proponents of CECL argue that the regulation can provide timelier provisions, while others are concerned about the potential for heightened reported earnings volatility. In this paper, we investigate the impact of CECL on the accuracy of banks’ loan loss provisions and on earnings quality. We empirically document that starting in the second half of 2020, banks adopting CECL report larger reserve releases and are more likely to report negative loan loss provisions than non-adopters. Using a difference-in-difference design we find that during the first two quarters of 2020, the dispersion of analysts earnings forecasts and the level of discretionary earnings are both larger for adopting banks than for non-adopters. We interpret these as evidence of less accurate provisions and lower earnings quality which is consistent with greater accounting noise and reporting bias caused by the adoption of CECL during high economic uncertainty.

Keywords: CECL, Expected Loss Model, Loan Loss Provisioning, Banking Regulation

JEL Classification: G21, G28, M41, M48

Suggested Citation

Bonaldi, Pietro and Liang, Pierre Jinghong and Yang, Lavender, Did CECL Improve Banks' Loan Loss Provisions and Earnings Quality during the COVID-19 Pandemic? (January 2023). Available at SSRN: https://ssrn.com/abstract=4360356 or http://dx.doi.org/10.2139/ssrn.4360356

Pietro Bonaldi (Contact Author)

Carnegie Mellon University ( email )

Pierre Jinghong Liang

Tepper School of Business, Carnegie Mellon University ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-3315 (Phone)
412-268-6837 (Fax)

HOME PAGE: http://www2.tepper.cmu.edu/andrew/liangj

Lavender Yang

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

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