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Deposit insurance and discretion in loan loss provisioning

Author

Listed:
  • Pugachev, Leo
  • Robin, Ashok
  • Wang, Dilin
  • Yang, Rong

Abstract

Deposit insurance (DI) incentivizes bank risk-taking and regulatory scrutiny. Through both mechanisms, it should affect bank accounting. This paper studies how a recent, substantial expansion in U.S. DI coverage impacts a key accounting policy: discretion in banks' loan loss provision (LLP). Relative to controls, affected banks post higher discretionary LLP, suggesting a capital-reducing or conservative bent. Results are strongest for those most exposed to the DI increase, those that increase risk most, and those subject to the most regulatory scrutiny. Our study is the first to show a direct impact of DI on bank accounting policy.

Suggested Citation

  • Pugachev, Leo & Robin, Ashok & Wang, Dilin & Yang, Rong, 2026. "Deposit insurance and discretion in loan loss provisioning," Journal of Corporate Finance, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:corfin:v:99:y:2026:i:c:s0929119926000532
    DOI: 10.1016/j.jcorpfin.2026.102995
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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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