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Loan loss provisioning and economic slowdowns: too much too late?

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Author Info
Luc Laeven
Giovanni Majnoni

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Abstract

Only recently the debate on bank capital regulation has devoted specific attention to the role that bank loan loss provisions can play as a part of the overall minimum capital regulatory framework. Several national regulators have adopted or are planning to introduce a cyclically adjustable requirement for loan loss provisions and the Basel Committee on Banking Supervision is considering how to address provisioning practices within a broad bank capital regulatory framework. This paper contributes to the ongoing debate by exploring the available evidence about bank loan loss provisioning around the world. We find that many banks tend to delay provisioning for bad loans until too late, when cyclical downturns have already set in, possibly magnifying the impact of the economic cycle on banks' income and capital. At the same time, we find a considerable difference in patterns followed by banks around the world.

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Article provided by Federal Reserve Bank of Boston in its journal Conference Series ; [Proceedings].

Volume (Year): (2002)
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Handle: RePEc:fip:fedbcp:y:2002:x:6

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Related research
Keywords: Risk management ; Loans;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Holmstrom, Bengt & Tirole, Jean, 2000. "Liquidity and Risk Management," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 295-319, August.
  2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  3. Kim, Daesik & Santomero, Anthony M., 1993. "Forecasting required loan loss reserves," Journal of Economics and Business, Elsevier, vol. 45(3-4), pages 315-329. [Downloadable!] (restricted)
  4. Santiago Fernández de Lis & Jorge Martínez Pagés & Jesús Saurina, 2000. "Credit Growth, Problem Loans and Credit Risk Provisioning in Spain," Banco de España Working Papers 0018, Banco de España. [Downloadable!]
  5. Allen N. Berger & Gregory F. Udell, 1993. "Did risk-based capital allocate bank credit and cause a credit crunch in the U.S.?," Finance and Economics Discussion Series 93-41, Board of Governors of the Federal Reserve System (U.S.).
    Other versions:
  6. Ahmed, Anwer S. & Takeda, Carolyn & Thomas, Shawn, 1999. "Bank loan loss provisions: a reexamination of capital management, earnings management and signaling effects," Journal of Accounting and Economics, Elsevier, vol. 28(1), pages 1-25, November. [Downloadable!] (restricted)
  7. Allen N. Berger & Richard J. Herring & Giorgio P. Szegö, 1995. "The Role of Capital in Financial Institutions," Center for Financial Institutions Working Papers 95-01, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  8. Rajan, Raghuram G, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 399-441, May. [Downloadable!] (restricted)
  9. Santiago Fernández de Lis & Jorge Martínez Pagés & Jesús Saurina, 2000. "Credit Growth, Problem Loans and Credit Risk Provisioning in Spain," Banco de España Working Papers 0018, Banco de España. [Downloadable!]
  10. Larry D. Wall & Timothy W. Koch, 2000. "Bank loan-loss accounting: a review of theoretical and empirical evidence," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 1-20. [Downloadable!]
  11. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
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  12. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1991-2), pages 205-248. [Downloadable!]
  13. Timothy W. Koch & Larry D. Wall, 1999. "Banks' discretionary loan loss provisions: how important are constraints and asymmetries?," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 99-112.
  14. Peek, Joe & Rosengren, Eric, 1995. "The Capital Crunch: Neither a Borrower nor a Lender Be," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 625-38, August. [Downloadable!] (restricted)
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  15. Chiuri, Maria Concetta & Ferri, Giovanni & Majnoni, Giovanni, 2001. "The macroeconomic impact of bank capital requirements in emerging economies - past evidence to assess the future," Policy Research Working Paper Series 2605, The World Bank. [Downloadable!]
    Other versions:
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