The Credit Risk-Taking Effect Of Banks’ Application Of Expected Credit Loss Model

It is considered as the biggest change in the field of bank accounting that the model of bank loan impairment has changed from incurred loss model to expected credit loss model.According to the relevant accounting standards,since 2018,more and more commercial banks at home and abroad have begun to use the expected credit loss model to calculate loan loss provisions,and the application of this model seems to be the general trend.However,no matter in theory or practice,the discussion on expected credit loss model has never stopped,and even there is still a big controversy.What kind of economic consequences it will produce is still uncertain.In this case,it is particularly necessary and critical to test the actual application effect of the model,which is of great significance to investigate whether the reform of the model is successful and how to further implement and improve it.Among many economic consequences,it is particularly important to explore the impact of the application of the expected credit loss model on the bank’s credit risktaking behavior.This is not only helpful to evaluate the function of expected credit loss model in risk prevention,but also has important practical significance for maintaining the security and stability of China’s banking financial system.Among them,the discussion from the perspective of industry credit allocation is particularly valuable.This will help us to investigate the changes of bank credit risk-taking behavior from the credit micro allocation structure,and also help us to explore the impact of the application of the expected credit loss model on the strength and role of banks in supporting the real economy.In view of this,this paper discusses the credit risk-taking effect of expected credit loss model from the perspective of industry credit allocation.On the other hand,China’s commercial banks are not only subject to accounting standards,but also subject to a number of financial regulatory systems.These financial regulatory factors also have an impact on bank credit risk-taking behavior.Therefore,in the current institutional environment,to study the credit risk-taking effect of the expected credit loss model,we need to discuss it in combination with financial regulatory factors.Only in this way can we evaluate its practical application effect more scientifically and comprehensively,and can we get important enlightenment on the coordination of accounting standards and financial supervision system.Based on the above thinking,this paper examines the impact of the application of expected credit loss model on bank credit risk-taking behavior from the perspective of industry credit allocation,and further discusses the impact of financial regulatory factors on the above effects combined with relevant financial regulatory systems.Among them,this paper mainly focuses on the industries with high bad debt risk(called"high-risk industry")to investigate the change of bank credit risk-taking behavior more effectively.Specifically,this paper mainly studies the following three sub problems:first,after banks use the expected credit loss model,how will the loan loss provision affect the credit allocation scale of high-risk industries?Second,when considering the factors of capital adequacy ratio,credit risk and liquidity risk in financial regulation,what will happen to the relationship between the application of expected credit loss model and the credit allocation scale of high-risk industries?Thirdly,under the supervision of efficiency,has the behavior of loan loss provision changed?How will this change affect the relationship between the expected credit loss model and the credit allocation scale of high-risk industries?Taking the quasi natural experiment of the applications of expected credit loss model in batches in China’s banking industry as the background,and using the data of China’s commercial banks from 2015 to 2019 and multiple difference model,through the empirical test,this paper finds that:first,after using the expected credit loss model,banks will significantly inhibit the credit allocation scale of high-risk industries through the provision for loan loss,and the effect has a certain sustainability.This shows that the expected credit loss model plays an effective role in reducing bank credit risk-taking behavior.But on the other hand,it also means that the contraction of credit allocation scale of banks to high-risk industries such as manufacturing and wholesale and retail industry may affect the strength of banks to support the real economy.The above inhibition effect may come from two paths:one is the decrease of capital adequacy ratio caused by the application of the expected credit loss model,which has a constraint effect on the bank’s credit risk-taking behavior;the other is that under the application of the expected credit loss model,the improvement of the timeliness of loan loss provision strengthens the effective transmission of risk information,and then inhibits the credit risk-taking behavior.Further research also shows that the decline of credit allocation scale in high-risk industries eventually leads to the reduction of the overall risk level of banks,but at the same time,the profit efficiency of banks is not significantly damaged.Second,under the expected credit loss model,the inhibitory effect of loan loss provision on the credit allocation scale of high-risk industries is more significant in banks with low capital adequacy ratio and high credit risk,but there is no significant difference in banks with different liquidity risk.This shows that capital adequacy ratio regulation and bank credit risk regulation have coordination with the expected credit loss model in restricting bank credit risk-taking behavior,but liquidity risk regulation has no significant impact.It also shows that the constraint path of capital adequacy ratio in conclusion 1 does exist.Thirdly,there is a significant earnings smoothing behavior of loan loss provision in the efficiency supervision environment of China’s commercial banks,and the further impact of this behavior is:after the application of the expected credit loss model,the less loan loss provision due to upward earnings management will significantly improve the bank’s credit allocation scale to high-risk industries,and the effect is more significant in the banks with low profitability,urban commercial banks and rural commercial banks,as well as non listed banks.In addition,under the expected credit loss model,the provision for non discretionary loan loss,which can truly reflect the credit risk of banks,can significantly inhibit the credit allocation scale of banks to high-risk industries.The above conclusions show that the exertion of inhibition function of expected credit loss model to bank credit risk-taking behavior largely depends on the quality of accounting information of loan loss provision,and also confirm the risk information transmission path in conclusion 1.The possible innovations and contributions of this paper include:first,it enriches the research on the economic consequences of applying the expected credit loss model.From the existing researches,the researches in this field are mainly limited to theoretical analysis,and a few empirical studies mainly measure the forward-looking loan loss provisions to indirectly investigate the economic consequences of the expected credit loss model.However,this method has some endogenous problems in the test process.On the other hand,there are very few empirical studies to directly test the actual effect of the expected credit loss model.Based on the quasi natural experiment of adopting the expected credit loss model in batches by commercial banks in China,and through the difference-in-differences model,this paper not only examines the impact of the application of the expected credit loss model on the credit allocation scale of high-risk industries,but also discusses the impact of relevant financial regulatory factors on the actual application effect of the model combined with important financial regulatory systems.Therefore,this paper is conducive to expand the relevant research on the economic consequences of the expected credit loss model.Second,it enriches the researches on the influencing factors of industry credit allocation.Previous studies on the influencing factors of industry credit allocation are mainly limited to industrial policy,collateral value,capital measurement methods and so on,while few studies are conducted from the perspective of accounting standards.This paper discusses the impact of the expected credit loss model in accounting standards on the credit allocation scale of high-risk industries,which is helpful to expand the researches in this field from the perspective of accounting.Thirdly,the conclusions of this paper provide important policy implications for the improvement and implementation of the expected credit loss model,and how the relevant financial regulatory system can coordinate and complement the model.At present,it is in the initial stage of the reform of the expected credit loss model,and the effect of many policies is not clear.This paper discusses the actual application effect of the expected credit loss model combined with the relevant financial regulatory system,which helps to evaluate the impact effect of the model more comprehensively and objectively,provides important empirical evidence for the further implementation and improvement of the model,and also provides policy reference for the coordinated development of accounting standards and financial regulatory system.In addition,this study also provides important enlightenment for banks and relevant departments to make effective trade-offs and choices between the dual objectives of risk prevention and supporting the real economy in the application of the expected credit loss model.