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Executive summary (partial) "This paper discusses policy considerations related to the regulatory treatment of accounting provisions under the Basel III regulatory capital framework. The timely recognition of, and provision for, credit losses serve to promote safe and sound banking systems and play an important role in bank regulation and supervision. An important lesson learnt from the 2007–09 global financial crisis was that incurred loss models often resulted in provisions that were “too little, too late”. This led the G20 Leaders and the Basel Committee on Banking Supervision to recommend that accounting standard setters consider modifying provisioning standards to incorporate forward-looking assessments in the estimation of credit losses. In response to this recommendation, both the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have adopted provisioning standards that require the use of expected credit loss (ECL) models rather than incurred loss models. The IASB published International Financial Reporting Standard (IFRS) 9 in July 2014, which will take effect on 1 January 2018 (earlier application is permitted). The FASB published its final standard on current expected credit losses (CECL) in June 2016. The FASB’s new standard will take effect on 1 January 2020 for certain banks that are public companies and in 2021 for all other banks, with early application permitted for all banks in 2019. The Basel Committee supports the use of ECL approaches and encourages their application in a manner that will achieve earlier recognition of credit losses than with incurred loss models while also providing incentives for banks to follow sound credit risk management practices … The Basel Committee is supportive of the ECL approaches, but the Committee nevertheless needs to consider the implications for regulatory capital of these approaches …"

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