The Implementation of the Expected Credit Loss Model and Income Smoothing in Commercial Banks:Deliberate Act or Unintentional Consequence?
Based on the"natural experiment"of the phased implementation of the expected credit loss(ECL)model in China's banking industry,this paper finds that the implementation of the ECL model significantly enhances the level of income smoothing among commercial banks.However,mecha-nism test results indicate that the income smoothing is not a deliberate act orchestrated by management.Instead,it results from the ECL model's improve-ment in the timeliness of provisioning and the suppression of procyclicality in provisioning,which"coincidentally"leads to a synchronized increase and decrease in pre-tax pre-provision profits and provisions.Heterogeneity analysis shows that the impact of the ECL model on income smoothing is stronger for commercial banks audited by the"Big Four"auditors,those whose executives'compensation is deferred,and those located in regions with lower gov-emmental fiscal pressure.This paper provides theoretical and empirical support for exploring the effects and mechanisms of the ECL model from the per-spective of income smoothing.
Expected Credit Loss ModelIncome SmoothingProvisions Procyclicality
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