How Does Loan Loss Accounting Influence Bank Lending? Evidence from the Current Expected Credit Loss (CECL) Model

ABSTRACT I explore the real effects of an update in loan loss accounting, the current expected credit loss (CECL) model. Although CECL’s predecessor only required banks to recognize losses after an event that made a loan uncollectible, CECL requires banks to recognize expected lifetime credit losses when originating loans. CECL’s earlier recognition of loan losses increases the cost of reserving regulatory capital for loans, decreasing banks’ willingness to lend. Empirically, I find that, following CECL’s approval, capital-constrained banks reduce their growth of total loans and residential loans. I also find that, for the residential loans banks continue to make, they choose to sell more shortly after origination, increasing the size of their originate-to-distribute (OTD) business. The increase in OTD mortgages is more pronounced for public banks, implying that their need to adopt CECL earlier than private banks outweighs the fact that they have better access to additional capital. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G21; M40; M41.