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Loan Loss Provision, Unsecured-Collateralized Loan Choice and Macro-Stability in China

Author

Listed:
  • Lim King Yoong

    (International Business School Suzhou, Xi’an Jiaotong-Liverpool University, Suzhou, China)

  • Liu Chunping

    (Nottingham Business School, 6122 Nottingham Trent University , Nottingham, England)

  • Tan Linzhi

    (Nottingham Business School, 6122 Nottingham Trent University , Nottingham, England)

Abstract

We develop a novel dynamic stochastic general equilibrium model with loan-loss provisions (LLPs) and unsecured-collateralized loan choice, the latter being endogenously determined due to enterprises having heterogeneous production capacity. Further, due to the presence of a second source of production uncertainty, which is only observed ex-post to loan contracting, type-specific aggregate default rates are endogenously determined too, which results in a model economy whose cyclicality can be driven significantly by LLP adjustment shocks. We estimate the model using actual Chinese data from 2004Q4 to 2020Q4. Our estimated model is able to generate co-movement between LLPs and the unsecured-collateralized loan ratio, a feature of the Chinese banking system that is consistent with empirical evidence. We also find that banks’ LLPs are countercyclical, despite the overall LLP regime still remaining relatively backwards-looking, indicating that the present Chinese banking regulations can be overly prudent.

Suggested Citation

  • Lim King Yoong & Liu Chunping & Tan Linzhi, 2025. "Loan Loss Provision, Unsecured-Collateralized Loan Choice and Macro-Stability in China," The B.E. Journal of Macroeconomics, De Gruyter, vol. 25(2), pages 847-884.
    • Handle: RePEc:bpj:bejmac:v:25:y:2025:i:2:p:847-884:n:1013
    DOI: 10.1515/bejm-2025-0101
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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