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  • June 2023
  • Case
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Accounting for Loan Losses at JPMorgan Chase: Predicting Credit Costs

By: Jonas Heese, Jung Koo Kang and James Weber
  • Format:Print
  • | Language:English
  • | Pages:22
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Abstract

The case examines the accounting for loan losses at a large bank, how a bank sets its Allowance for Loan and Lease Losses (ALLL) on its financial statements. ALLL, and the rules that set them, determine when banks would and would not extend loans, which significantly impacts the economy. The case looks at the new current expected credit loss method (CECL) introduced in January 2020 and compares it with the prior incurred loss method that had existed for decades. The incurred loss method was a rules-based method that set loss reserve levels by looking at both the historical performance of loans and at current economic conditions. CECL was a principles-based method that set loss reserve levels by considering past loan performance, current economic conditions, and also expected future losses. The case also explores what banks, regulators, and investors thought about the new method. Both bankers and regulators called CECL the biggest change ever to bank accounting. JPMorgan Chase CEO Jamie Dimon called CECL accounting crazy. Financial Accounting Standards Board member Hal Schroeder indicated CECL would lead to a safer financial system and a more resilient economy. Investors and analysts were trying to figure out the new CECL method and what impact it would have on financial statements.

Keywords

Accounting Standards; Accrual Accounting; Financial Statements; Financial Reporting; Banks and Banking; Financing and Loans; Banking Industry; United States

Citation

Heese, Jonas, Jung Koo Kang, and James Weber. "Accounting for Loan Losses at JPMorgan Chase: Predicting Credit Costs." Harvard Business School Case 123-042, June 2023.
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About The Authors

Jonas Heese

Accounting and Management
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Jung Koo Kang

Accounting and Management
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Related Work

    • October 2023
    • Faculty Research

    Accounting for Loan Losses at JPMorgan Chase: Predicting Credit Costs

    By: Jonas Heese and Jung Koo Kang
    • December 2023
    • Faculty Research

    Accounting for Loan Losses at JPMorgan Chase: Predicting Credit Costs

    By: Jonas Heese and Jung Koo Kang
Related Work
  • Accounting for Loan Losses at JPMorgan Chase: Predicting Credit Costs By: Jonas Heese and Jung Koo Kang
  • Accounting for Loan Losses at JPMorgan Chase: Predicting Credit Costs By: Jonas Heese and Jung Koo Kang
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