Expected Losses, Unexpected Costs?

This paper examines the real effects of banks switching to an expected credit loss (ECL) framework under IFRS 9. I identify the cross-bank variation in the ECL transition from banks' mandatory reconciliation disclosures about the day-one impact of the accounting change. I find evidence that the ECL rules deteriorate the credit landscape for risky and opaque borrowers, i.e., small- and medium-sized enterprises (SMEs). Affected banks reduce lending to SMEs by a relative 23 percent and switch to corporate lending and non-loan assets. Consistent with a decline in credit supply—rather than in credit demand—SMEs that work with affected banks receive less funding, conditional on applying for a loan. I also observe that in their contracts with SMEs, affected banks increase interest rates and collateral requirements, while reducing loan amounts and maturities. Despite these costs, my inferences do not imply that the ECL paradigm is socially undesirable