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Do delays in expected loss recognition affect banks' willingness to lend?

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  • Beatty, Anne
  • Liao, Scott
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    Abstract

    Banks can decrease their future capital inadequacy concerns by reducing lending. The capital crunch theory predicts that lending is particularly sensitive to regulatory capital constraints during recessions, when regulatory capital declines and external-financing frictions increase. Regulators and policy makers argue that the current loan loss provisioning rules magnify this pro-cyclicality. Exploiting variation in the delay in expected loss recognition under the current incurred loss model, we find that reductions in lending during recessionary relative to expansionary periods are lower for banks that delay less. We also find that smaller delays reduce the recessionary capital crunch effect. These results hold across management quality partitions.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 52 (2011)
    Issue (Month): 1 (June)
    Pages: 1-20

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    Handle: RePEc:eee:jaecon:v:52:y:2011:i:1:p:1-20

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    Web page: http://www.elsevier.com/locate/jae

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    Keywords: Loss recognition Lending Banks Capital constraints Pro-cyclicality;

    References

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    Cited by:
    1. Chung-Hua Shen & Haumin Chu & Yu-Chun Wang, 2012. "Who Furls the Umbrella on Rainy Days? The Role of Bank Ownership Type and Bank Size in SME Lending," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 48(0), pages 184-199, July.
    2. Tan, Liang, 2013. "Creditor control rights, state of nature verification, and financial reporting conservatism," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 1-22.

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