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The Effect of Credit Competition on Banks’ Loan-Loss Provisions

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  • Dou, Yiwei
  • Ryan, Stephen G.
  • Zou, Youli

Abstract

Exploiting differential interstate-branching deregulation across contiguous counties of adjacent states, we investigate the effect of entry threat on incumbent banks’ loan-loss provisions. Incumbents exposed to entry threat have offsetting incentives; lower provisions make their loan-underwriting quality appear better, deterring entry, but make local economic conditions appear better, encouraging entry. We find that the incentive to increase apparent loan-underwriting quality dominates on average. We further find that this incentive is stronger in counties with a higher proportion of heterogeneous loans, while the other incentive dominates in counties with both low heterogeneous loans and highly volatile economic conditions.

Suggested Citation

  • Dou, Yiwei & Ryan, Stephen G. & Zou, Youli, 2018. "The Effect of Credit Competition on Banks’ Loan-Loss Provisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(3), pages 1195-1226, June.
  • Handle: RePEc:cup:jfinqa:v:53:y:2018:i:03:p:1195-1226_00
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    Cited by:

    1. Aobdia, Daniel & Dou, Yiwei & Kim, Jungbae, 2021. "Public audit oversight and the originate-to-distribute model," Journal of Accounting and Economics, Elsevier, vol. 72(1).
    2. Yue, Heng & Zhang, Liandong & Zhong, Qinlin, 2022. "The politics of bank opacity," Journal of Accounting and Economics, Elsevier, vol. 73(2).

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