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Determinants of the Loan Loss Allowance: Some Cross-Country Comparisons

  • Iftekhar Hasan
  • Larry D. Wall

This paper analyzes the determinants of banks' loan loss allowance for samples of U.S. banks and three non-U.S. samples: a group of 21 countries, Canada, and Japan. The model includes fundamental (or nondiscretionary) determinants of the allowance, such as nonperforming loans, and discretionary determinants, such as income before the loan loss provision. The results suggest that the loan loss allowance is sensitive to preprovision income in almost all samples. However, the results also suggest that some variables thought to reflect fundamental factors in U.S. analysis, such as net charge-offs, are not significant factors for non-U.S. banks. Copyright 2004 by the Eastern Finance Association.

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Article provided by Eastern Finance Association in its journal The Financial Review.

Volume (Year): 39 (2004)
Issue (Month): 1 (02)
Pages: 129-152

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Handle: RePEc:bla:finrev:v:39:y:2004:i:1:p:129-152
Contact details of provider: Web page: http://www.easternfinance.org/

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  1. Hesna Genay, 1998. "Assessing the condition of Japanese banks: how informative are accounting earnings?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 12-34.
  2. Shrieves, Ronald E. & Dahl, Drew, 2003. "Discretionary accounting and the behavior of Japanese banks under financial duress," Journal of Banking & Finance, Elsevier, vol. 27(7), pages 1219-1243, July.
  3. Scholes, Myron S & Wilson, G Peter & Wolfson, Mark A, 1990. "Tax Planning, Regulatory Capital Planning, and Financial Reporting Strategy for Commercial Banks," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 625-50.
  4. Moyer, Susan E., 1990. "Capital adequacy ratio regulations and accounting choices in commercial banks," Journal of Accounting and Economics, Elsevier, vol. 13(2), pages 123-154, July.
  5. Takeo Hoshi & Anil Kashyap, 1999. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Working Papers 7250, National Bureau of Economic Research, Inc.
  6. Wetmore, Jill L. & Brick, John R., 1994. "Loan-loss provisions of commercial banks and adequate disclosure: A note," Journal of Economics and Business, Elsevier, vol. 46(4), pages 299-305, October.
  7. Kane, Edward J., 2000. "The dialectical role of information and disinformation in regulation-induced banking crises," Pacific-Basin Finance Journal, Elsevier, vol. 8(3-4), pages 285-308, July.
  8. Beaver, William H. & Engel, Ellen E., 1996. "Discretionary behavior with respect to allowances for loan losses and the behavior of security prices," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 177-206, October.
  9. 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.
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