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Do Loan Loss Provisions Affect the Credit Fluctuations in China’s Banking System?

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  • Zongrun Wang
  • Nan Xie
  • Yanbo Jin

Abstract

The global financial crisis of 2008 sparked new ideas on pro-cyclical transmission in the financial system. The accounting treatment method of loan loss provisions differs between the accounting standards that banks use and the supervisory rules of banks. This fundamental difference has attracted wide attention from academics and regulators. This article studies whether bank loan loss provisions affect credit fluctuation in China’s banking system. We divide loan loss provisions into discretionary and non-discretionary loan loss provisions. We find that non-discretionary loan loss provisions result in greater credit fluctuation, whereas discretionary loan loss provisions have no significant impact on credit fluctuation. Further evidence shows that the relation between non-discretionary loan loss provisions and credit fluctuations does not vary among different types of banks. Overall, our study shows that non-discretionary loan loss provisions can increase credit fluctuation and therefore strengthen banks’ pro-cyclical behavior.

Suggested Citation

  • Zongrun Wang & Nan Xie & Yanbo Jin, 2019. "Do Loan Loss Provisions Affect the Credit Fluctuations in China’s Banking System?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 55(11), pages 2425-2436, September.
    • Handle: RePEc:mes:emfitr:v:55:y:2019:i:11:p:2425-2436
    DOI: 10.1080/1540496X.2018.1553159
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    Cited by:

    1. Ozili, Peterson K, 2021. "Banking sector earnings management using loan loss provisions in the Fintech era," MPRA Paper 105083, University Library of Munich, Germany.
    2. Ren, Meixu & Ke, Konglin & Yu, Xin & Zhao, Jinxuan, 2023. "Local governments' economic growth target pressure and bank loan loss provision: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 1-14.
    3. Ozili, Peterson K, 2019. "Bank loan loss provisioning during election years in Nigeria," MPRA Paper 96704, University Library of Munich, Germany.
    4. Ozili, Peterson K, 2020. "Bank loan loss provisioning during election years: cross-country evidence," MPRA Paper 96639, University Library of Munich, Germany.

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