Seminar (Dept. of Finance)

Title: Uniform Standards, Unified Risks: How the Expected Credit Loss Model Homogenizes Banks and Amplifies Systemic Risk

Speaker: Ruichang Lu, Associate Professor, Peking University

Time: 10:00-11:30, Dec 20, 2024 (Friday)

Venue: Room 1008, Mingde Business Building

Language: English/Chinese

ABSTRACT:

This paper examines the impact of the Expected Credit Loss (ECL) model on systemic risk in the banking sector. By leveraging international banking data, we find that ECL implementation increases banks’ systemic risk. Cross-sectional analyses reveal that the impact of systemic risk is more pronounced in bank-centric countries and during economic downturns. We further zoom in on the underlying mechanism and show greater bank homogeneity, manifested in synchronized loan loss provisions, similar asset holding, and common auditors, is an important channel through which ECL amplifies the interconnectedness of the banking system. Last, we confirm that such results are not driven by heightened individual bank risk and day-one effect and are robust to various systemic risk measures. Our findings shed light on the unintended consequences of the global ECL implementation.