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Bank loan loss provisioning for sustainable development: the case for a sustainable or green loan loss provisioning system

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  • Ozili, Peterson K

Abstract

The purpose of this study is to present a sustainable (or green) loan loss provisioning system that align bank loan loss provisioning with the sustainable development goals. The findings of the study are that the proposed sustainable (or green) loan loss provisioning system will align bank loan loss provisioning with the sustainable development goals by adjusting loan loss provisions estimates to reflect the environmental benefits and costs of borrowers’ business activities. Banks will incur additional provisions above normal provisions for loans issued to businesses whose activities are harmful to the environment and the climate. Banks will allocate fewer provisions whenever they issue loans to eco-friendly or green businesses. The implication of the proposed sustainable (or green) loan loss provisioning system is that bank regulators and supervisors need to consider the impact of the sustainable (or green) loan loss provisioning system on bank capital and bank stability.

Suggested Citation

  • Ozili, Peterson K, 2023. "Bank loan loss provisioning for sustainable development: the case for a sustainable or green loan loss provisioning system," MPRA Paper 115989, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:115989
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    References listed on IDEAS

    as
    1. Anna Avrampou & Antonis Skouloudis & George Iliopoulos & Nadeem Khan, 2019. "Advancing the Sustainable Development Goals: Evidence from leading European banks," Sustainable Development, John Wiley & Sons, Ltd., vol. 27(4), pages 743-757, July.
    2. Benjamin H Cohen & Gerald A. Edwards, Jr., 2017. "The new era of expected credit loss provisioning," BIS Quarterly Review, Bank for International Settlements, March.
    3. Simona Cosma & Andrea Venturelli & Paola Schwizer & Vittorio Boscia, 2020. "Sustainable Development and European Banks: A Non-Financial Disclosure Analysis," Sustainability, MDPI, vol. 12(15), pages 1-19, July.
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    More about this item

    Keywords

    Bank performance; loan loss provisions; sustainability; sustainable development; SDGs; green washing; credit risk; green loan loss provisioning; sustainable loan loss provisioning.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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