The Effect of the Switch to the Expected Credit Loss Model for Loan Loss Provisioning on Cross-border Borrowing

The switch from the incurred credit loss model to the expected credit loss model with IFRS 9 adoption was a revolutionary shift in bank accounting that requiring the banks to monitor their borrowers more closely for expected loan losses to recognize loan losses timelier. We posit that IFRS 9 adoption will have spillover effects on domestic firms’ cross-border borrowing due to domestic credit supply reduction and borrowers’ preference to avoid costly bank monitoring. Using a difference-in-differences analysis of loan contracting data from 62 countries, we find that IFRS 9 adoption increases cross-border borrowing of affected firms in the IFRS 9-adopting countries. Consistent with domestic credit supply reduction being a channel, we find that the increase in cross-border borrowing is concentrated in firms in IFRS 9-adopting countries with a larger decrease in domestic bank credit. Consistent with avoidance of costly bank monitoring being a channel, we find that the increase in cross-border borrowing is concentrated in firms in IFRS 9-adopting countries with a larger increase in loan monitoring intensity. Finally, we show that the increase in cross-border borrowing is more pronounced for firms in economies with higher legal enforcement strength, with closer ties with foreign lenders, with less timely exante loan loss recognition, or with less developed domestic bond markets.

Other authors: Jia Guo (The Hong Kong Polytechnic University), Yifan Jia (The University of Hong Kong), Haoran Zhu (Southern University of Science and Technology)