Abstract
We explore whether the shift to the Expected Credit Loss model (ECL) helps Loan Loss Provisions (LLPs) anticipate future overall banking risk as compared to the Incurred Credit Loss model (ICL). Using a sample of European banks from 2015–2021, we find that ECL is more effective than ICL. We are pioneer to find evidence that stage 2 Loan Loss Allowance (LLA) is a good driver of future overall banking risk and that provisions moratoria due to the COVID-19 pandemic diminished the identified significant effect of LLPs and stage 2 LLA on banking risk, as expected.
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