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Forward Looking Loan Provisions: Credit Supply and Risk-Taking

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  • Bernardo Morais
  • Gaizka Ormazabal
  • José-Luis Peydró
  • Mónica Roa
  • Miguel Sarmiento

Abstract

We show corporate-level real, financial, and (bank) risk-taking effects associated with calculating loan provisions based on expected—rather than incurred—credit losses. For identification, we exploit unique features of a Colombian reform and supervisory, matched loan-level data. The regulatory change induces a dramatic increase in provisions. Banks tighten all new lending conditions, adversely affecting borrowing-firms, with stronger effects for risky-firms. Moreover, to minimize provisioning, more affected (less-capitalized) banks cut credit supply to risky-firms—SMEs with shorter credit history, less tangible assets or more defaulted loans—but engage in “search-for-yield” within regulatory constraints and increase portfolio concentration, thereby decreasing risk diversification. **** RESUMEN: Este documento analiza los efectos reales, financieros y de toma de riesgos bancarios asociados al cambio en el cálculo de las provisiones de los préstamos con base en pérdidas esperadas a las calculadas con base en pérdidas incurridas. En nuestra identificación explotamos características únicas de una reforma regulatoria en Colombia usando datos a nivel de préstamos banco-firma. Encontramos que el cambio regulatorio condujo a un importante incremento en las provisiones bancarias. Asimismo, los bancos endurecieron los estándares de crédito, afectando negativamente a las firmas deudoras con efectos más fuertes sobre las firmas riesgosas. Para reducir el nivel de provisiones, los bancos más afectados (menos capitalizados) redujeron la oferta de crédito a las firmas riesgosas (firmas pequeñas con menor historia crediticia, menores activos tangibles o mayores préstamos en mora) y a su vez, incrementaron la búsqueda de retorno dentro del sector menos afectado por la regulación, aumentaron así la concentración del portafolio de créditos y por ende reduciendo la diversificación del riesgo.

Suggested Citation

  • Bernardo Morais & Gaizka Ormazabal & José-Luis Peydró & Mónica Roa & Miguel Sarmiento, 2021. "Forward Looking Loan Provisions: Credit Supply and Risk-Taking," Borradores de Economia 1159, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:1159
    DOI: https://doi.org/10.32468/be.1159
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    Cited by:

    1. Andrea Fabiani & Martha López & José-Luis Peydró & Paul E. Soto, 2021. "Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy," Borradores de Economia 1162, Banco de la Republica de Colombia.

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    More about this item

    Keywords

    Loan provisions; IFRS9; ECL; corporate credit; real effects; bank risk-taking; Provisiones de préstamos; crédito corporativo; efectos reales; toma de riesgos bancarios;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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