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Local governments' economic growth target pressure and bank loan loss provision: Evidence from China

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  • Ren, Meixu
  • Ke, Konglin
  • Yu, Xin
  • Zhao, Jinxuan

Abstract

This paper aims to investigate whether and how the top-down amplification of economic growth targets affects banks' loan loss provision (LLP). We find that banks in prefecture-level cities with higher economic growth target pressure (EGTP) will withdraw more LLPs, indicating that they will accrue reserves prospectively to deal with potential credit losses. We further find that EGTP reduces credit allocation efficiency and increases future loan losses, and banks' risk prevention motivation is the mechanism for accruing LLPs. It's also shown that fiscal pressure and promotion pressure will amplify EGTP's effect, while reduced government intervention will weaken banks' risk prevention motivation. Overall, our paper provides systematic evidence on how banks respond to the negative impact of EGTP through loan loss provisioning.

Suggested Citation

  • Ren, Meixu & Ke, Konglin & Yu, Xin & Zhao, Jinxuan, 2023. "Local governments' economic growth target pressure and bank loan loss provision: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 1-14.
    • Handle: RePEc:eee:reveco:v:87:y:2023:i:c:p:1-14
    DOI: 10.1016/j.iref.2023.04.018
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    More about this item

    Keywords

    Economic growth target pressure; Loan loss provision; Risk prevention motivation; Government intervention;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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