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Do delays in expected loss recognition affect banks' willingness to lend?

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  • Beatty, Anne
  • Liao, Scott
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    Abstract

    Banks can decrease their future capital inadequacy concerns by reducing lending. The capital crunch theory predicts that lending is particularly sensitive to regulatory capital constraints during recessions, when regulatory capital declines and external-financing frictions increase. Regulators and policy makers argue that the current loan loss provisioning rules magnify this pro-cyclicality. Exploiting variation in the delay in expected loss recognition under the current incurred loss model, we find that reductions in lending during recessionary relative to expansionary periods are lower for banks that delay less. We also find that smaller delays reduce the recessionary capital crunch effect. These results hold across management quality partitions.

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    File URL: http://www.sciencedirect.com/science/article/pii/S016541011100019X
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    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 52 (2011)
    Issue (Month): 1 (June)
    Pages: 1-20

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    Handle: RePEc:eee:jaecon:v:52:y:2011:i:1:p:1-20
    Contact details of provider: Web page: http://www.elsevier.com/locate/jae

    Keywords: Loss recognition Lending Banks Capital constraints Pro-cyclicality;

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    Cited by:

    1. Beatty, Anne & Liao, Scott, 2014. "Financial accounting in the banking industry: A review of the empirical literature," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 339-383.
    2. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2016. "Cyclically Adjusted Provisions and Financial Stability," IDB Publications (Working Papers) 94136, Inter-American Development Bank.
    3. Onali, Enrico & Ginesti, Gianluca, 2015. "New Accounting Rules for Loan Loss Provisions in Europe: Much Ado about Nothing?," MPRA Paper 64266, University Library of Munich, Germany, revised 10 May 2015.
    4. Bryce, Cormac & Dadoukis, Aristeidis & Hall, Maximilian & Nguyen, Linh & Simper, Richard, 2015. "An analysis of loan loss provisioning behaviour in Vietnamese banking," Finance Research Letters, Elsevier, vol. 14(C), pages 69-75.
    5. Malgorzata Olszak & Mateusz Pipien & Iwona Kowalska & Sylwia Roszkowska, 2015. "Do regulations and supervision shape the capital crunch effect of large banks in the EU?," Faculty of Management Working Paper Series 32015, University of Warsaw, Faculty of Management.
    6. Tan, Liang, 2013. "Creditor control rights, state of nature verification, and financial reporting conservatism," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 1-22.
    7. Liangliang Jiang & Ross Levine & Chen Lin, 2014. "Competition and Bank Opacity," NBER Working Papers 20760, National Bureau of Economic Research, Inc.
    8. Chung-Hua Shen & Haumin Chu & Yu-Chun Wang, 2012. "Who Furls the Umbrella on Rainy Days? The Role of Bank Ownership Type and Bank Size in SME Lending," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 48(0), pages 184-199, July.
    9. Domikowsky, Christian & Bornemann, Sven & Duellmann, Klaus & Pfingsten, Andreas, 2014. "Loan loss provisioning and procyclicality: Evidence from an expected loss model," Discussion Papers 39/2014, Deutsche Bundesbank, Research Centre.
    10. Cummings, James R. & Durrani, Kassim J., 2016. "Effect of the Basel Accord capital requirements on the loan-loss provisioning practices of Australian banks," Journal of Banking & Finance, Elsevier, vol. 67(C), pages 23-36.
    11. Bholat, David & Lastra, Rosa & Markose, Sheri & Miglionico, Andrea & Sen, Kallol, 2016. "Non-performing loans: regulatory and accounting treatments of assets," Bank of England working papers 594, Bank of England.
    12. Khan, Mozaffar & Vyas, Dushyantkumar, 2015. "The Capital Purchase Program and subsequent bank SEOs," Journal of Financial Stability, Elsevier, vol. 18(C), pages 91-105.

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