The expected credit loss (ECL) model recently adopted in many jurisdictions can cut the procyclicality of capital and leverage ratios, research published by the Bank of England finds.

Mahmoud Fatouh and Simone Giansante contrast the ECL approach with the previous ‘incurred loss’ model, which only increased provisioning when losses actually occurred. This led to banks building relatively low provisions in good times and then having to scramble to build them up during crises.

Using stylised loan