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Are banks forward-looking in their loan loss provisioning? Evidence from the Senior Loan Officer Opinion Survey (SLOOS)

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  • Lakshmi Balasubramanyan
  • James B. Thomson
  • Saeed Zaman

Abstract

The purpose of this study is to empirically analyze if loan loss provisioning is forward-looking. Using a confidential dataset that directly helps us identify loan demand and loan supply at the bank level, we test if the banks? provisioning behavior is different before and after the crisis. We find, for the entire sample of banks, loan loss provisioning is forward-looking and statistically significant in the post-crisis period. Our results show that the top quartiles of banks in our dataset exhibit a forward-looking approach to loan loss provisioning both in the pre- and post-crisis period. From a policy perspective, the top quartile of banks in our sample is engaged in forward-looking loan loss provisioning. From an accounting stance, this may be suggestive of the largest banks being more engaged in earnings management and income smoothing than the smallest banks in our sample. However, from the banking regulation perspective, implementing forwardlooking loan loss provisioning is economically intuitive and will help build a countercyclical buffer, thereby strengthening bank balance sheets.

Suggested Citation

  • Lakshmi Balasubramanyan & James B. Thomson & Saeed Zaman, 2013. "Are banks forward-looking in their loan loss provisioning? Evidence from the Senior Loan Officer Opinion Survey (SLOOS)," Working Papers (Old Series) 1313, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1313
    DOI: 10.26509/frbc-wp-201313
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    Cited by:

    1. Urooj Khan & Alvis K. Lo, 2019. "Bank Lending Standards and Borrower Accounting Conservatism," Management Science, INFORMS, vol. 65(11), pages 5337-5359, November.
    2. Urooj Khan & N. Bugra Ozel, 2016. "Real Activity Forecasts Using Loan Portfolio Information," Journal of Accounting Research, Wiley Blackwell, vol. 54(3), pages 895-937, June.
    3. Ozili, Peterson K, 2017. "Bank Loan Loss Provisions Research: A Review," MPRA Paper 76495, University Library of Munich, Germany.
    4. Alejandro Jara & Juan-Francisco Martínez & Daniel Oda, 2017. "Bank’s Lending Growth in Chile: The Role of the Senior Loan Officers Survey," Working Papers Central Bank of Chile 802, Central Bank of Chile.
    5. Couch, Robert & Thibodeau, Nicole & Wu, Wei, 2017. "Are fair value options created equal? A study of SFAS 159 and earnings volatility," Advances in accounting, Elsevier, vol. 38(C), pages 15-29.

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