Real Effects of Lagged Guidance from Prudential Regulators on CECL

This paper examines the impact of a lag in guidance from prudential regulators when new accounting standards are issued. Using the recent introduction of the Current Expected Credit Losses (CECL) standard, we examine whether the lack of concurrent guidance from accounting standard setters and bank regulators had adverse real effects. We refer to the period following CECL pronouncement in 2016 but prior to the 2018 issuance of guidelines from prudential banking regulators on how they would incorporate CECL’s impact into their bank assessments as the lagged guidance period. We find that during the lagged guidance period, banks reduce loan amounts and increase loan spreads for affected loans (Term Loan As, or TLAs) relative to unaffected loans (Term Loan Bs, or TLBs). Following the issuance of regulatory guidelines in 2018, however, banks relax their loan terms, i.e., increase loan amounts and reduce loan spreads on TLAs relative to TLBs. Furthermore, we show that the stricter TLA terms during the lagged guidance period coincide with decreased investments by corporate borrowers dependent exclusively on TLAs relative to other borrowers. Cross-sectional tests show that the decrease in investments is stronger for firms that are frequent borrowers and are financially constrained. The findings indicate that delayed guidance from industry regulators when new accounting standards are issued may adversely affect regulated economic entities and have spillover effects in the economy.