Expected Losses, Unexpected Costs? Evidence from SME Credit Access under IFRS 9

This paper examines lending effects of European banks switching to an expected credit loss (ECL) model under IFRS 9. I find evidence that ECL transition deteriorates the credit landscape for SMEs as risky, opaque, and bank-dependent borrowers. Post ECL, Affected banks have reduced SME lending by 16–20 percent. Banks’ financial reporting objectives and implementation difficulties explain these findings, while regulatory capital adequacy concerns seem less relevant. Additional tests performed at the borrower and loan-contract levels indicate rising interest rates and collateral requirements and declining loan amounts and maturities for SMEs that do business with affected banks. Echoing these findings, further survey evidence suggests that affected SMEs receive less credit, conditional on applying for a loan.