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

Abstract

<p>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 costly bank monitoring avoidance 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 when there are closer ties between lender’s and borrower’s economies or for firms in economies with less developed domestic bond markets.<br></p>