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Does uncertainty matter for loan charge-offs?

Author

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  • Laetitia Lepetit

    () (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)

  • Frank Strobel

    () (University of Birmingham [Birmingham])

  • David G. Dickinson

    (University of Birmingham [Birmingham])

Abstract

Using a stylized real options model, we show that discretion over the timing of charging off a non-performing loan could be economically justified when collateral values are uncertain and there is a chance of loan recovery. The implied hypothesis of an “uncertainty dependence” aspect in loan charge-offs is empirically tested and validated using a panel of European banks. A welfare-maximizing regulator might want to let banks pursue such discretionary loan charge-off behavior, with the problem of distinguishing it from alternative capital management and income smoothing objectives, while transparency-seeking accounting standards setters would presumably not.

Suggested Citation

  • Laetitia Lepetit & Frank Strobel & David G. Dickinson, 2012. "Does uncertainty matter for loan charge-offs?," Post-Print hal-01098926, HAL.
  • Handle: RePEc:hal:journl:hal-01098926
    DOI: 10.1016/j.intfin.2011.09.006
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01098926
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    Cited by:

    1. Chaiporn Vithessonthi, 2016. "The Consequences of Bank Loan Growth: Evidence from Asia," PIER Discussion Papers 19., Puey Ungphakorn Institute for Economic Research, revised Feb 2016.
    2. repec:rba:rbaacv:acv2017-04 is not listed on IDEAS
    3. Claudio Borio & Boris Hofmann, 2017. "Is Monetary Policy Less Effective When Interest Rates Are Persistently Low?," RBA Annual Conference Volume,in: Jonathan Hambur & John Simon (ed.), Monetary Policy and Financial Stability in a World of Low Interest Rates Reserve Bank of Australia.

    More about this item

    Keywords

    Discretion; Loan charge-off; Uncertainty dependence; Real option;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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