Jorge Abad, Javier Suarez, 02 April 2020

Incurred loss provisioning is due to be replaced by expected loss provisioning in many countries around the world, because it was perceived to increase procyclicality. This column quantifies, under alternative provisioning standards, the impact of the arrival of an average recession on a bank portfolio of European corporate loans. It argues that expected loss provisioning may in fact worsen procyclicality, and policymakers should, therefore, delay and freeze the transitional arrangements currently in place for the duration of the COVID-19 crisis.

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