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Effects of loan loss provisions on growth in bank lending: some international comparisons

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  • Vincent Bouvatier

    () (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Laetitia Lepetit

Abstract

A dynamic provisioning system is one of the instruments that regulators could use for introducing counter-cyclicality into prudential regulation. The potential effectiveness of such instrument depends on how far actual backward-looking provisioning practices exacerbate growth in bank lending. We therefore investigate whether backward-looking provisioning practices amplify growth in bank lending and, if such an effect exists, whether there are differences in its magnitude across countries. Our results show that backwardlooking provisioning systems exacerbate banks' lending fluctuations in both developed and emerging countries, but with a stronger impact for emerging countries.
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Suggested Citation

  • Vincent Bouvatier & Laetitia Lepetit, 2012. "Effects of loan loss provisions on growth in bank lending: some international comparisons," Post-Print hal-01385857, HAL.
  • Handle: RePEc:hal:journl:hal-01385857
    Note: View the original document on HAL open archive server: https://hal-univ-paris10.archives-ouvertes.fr/hal-01385857
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    1. Asokan Anandarajan & Iftekhar Hasan & Cornelia McCarthy, 2007. "Use of loan loss provisions for capital, earnings management and signalling by Australian banks," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 47(3), pages 357-379.
    2. Laeven, Luc & Majnoni, Giovanni, 2003. "Loan loss provisioning and economic slowdowns: too much, too late?," Journal of Financial Intermediation, Elsevier, vol. 12(2), pages 178-197, April.
    3. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    4. Iftekhar Hasan & Larry D. Wall, 2004. "Determinants of the Loan Loss Allowance: Some Cross-Country Comparisons," The Financial Review, Eastern Finance Association, vol. 39(1), pages 129-152, February.
    5. Bouvatier, Vincent & Lepetit, Laetitia, 2008. "Banks' procyclical behavior: Does provisioning matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 513-526, December.
    6. Gabriel Jiménez & Jesús Saurina, 2006. "Credit Cycles, Credit Risk, and Prudential Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
    7. Vincent Bouvatier & Lætitia Lepetit, 2011. "Canal des provisions bancaires et cyclicité du marché du crédit," Revue économique, Presses de Sciences-Po, vol. 62(1), pages 67-85.
    8. Bouvatier, Vincent & Lepetit, Laetitia, 2012. "Provisioning rules and bank lending: A theoretical model," Journal of Financial Stability, Elsevier, vol. 8(1), pages 25-31.
    9. Ahmed, Anwer S. & Takeda, Carolyn & Thomas, Shawn, 1999. "Bank loan loss provisions: a reexamination of capital management, earnings management and signaling effects," Journal of Accounting and Economics, Elsevier, vol. 28(1), pages 1-25, November.
    10. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    11. Lobo, Gerald J & Yang, Dong-Hoon, 2001. "Bank Managers' Heterogeneous Decisions on Discretionary Loan Loss Provisions," Review of Quantitative Finance and Accounting, Springer, vol. 16(3), pages 223-250, May.
    12. Fonseca, Ana Rosa & González, Francisco, 2008. "Cross-country determinants of bank income smoothing by managing loan-loss provisions," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 217-228, February.
    13. Bikker, J.A. & Metzemakers, P.A.J., 2005. "Bank provisioning behaviour and procyclicality," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(2), pages 141-157, April.
    14. Laurent Clerc & Françoise Drumetz & Olivier Jaudoin, 2001. "To what extent are prudential and accounting arrangements pro- or countercyclical with respect to overall financial conditions?," BIS Papers chapters,in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 197-210 Bank for International Settlements.
    15. Kanagaretnam, Kiridaran & Krishnan, Gopal V. & Lobo, Gerald J., 2009. "Is the market valuation of banks' loan loss provision conditional on auditor reputation?," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1039-1047, June.
    16. Beaver, William H. & Engel, Ellen E., 1996. "Discretionary behavior with respect to allowances for loan losses and the behavior of security prices," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 177-206, October.
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    1. repec:eee:riibaf:v:42:y:2017:i:c:p:1208-1218 is not listed on IDEAS
    2. Olszak, Małgorzata & Pipień, Mateusz, 2013. "Cross Country Linkages as Determinants of Procyclicality of Loan Loss Provisions – Empirical Importance of SURE Specification," MPRA Paper 53784, University Library of Munich, Germany.
    3. Bouvatier, Vincent & Lepetit, Laetitia & Strobel, Frank, 2014. "Bank income smoothing, ownership concentration and the regulatory environment," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 253-270.
    4. Wahyoe Soedarmono & Amine Tarazi & Agusman Agusman & Gary S. Monroe & Dominic Gasbarro, 2016. "Loan Loss Provisions and Lending Behavior of Banks: Do Information Sharing and Borrower Legal Rights Matter?," Working Papers hal-01316717, HAL.
    5. Soedarmono, Wahyoe & Sitorus, Djauhari & Tarazi, Amine, 2017. "Abnormal loan growth, credit information sharing and systemic risk in Asian banks," Research in International Business and Finance, Elsevier, vol. 42(C), pages 1208-1218.
    6. Soedarmono, Wahyoe & Pramono, Sigid Eko & Tarazi, Amine, 2017. "The procyclicality of loan loss provisions in Islamic banks," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 911-919.
    7. Fauziah Mahat & Noor Azman Ali, 2015. "The Roles of Risk Governance on Islamic Banking Systems," Proceedings of International Academic Conferences 2705187, International Institute of Social and Economic Sciences.
    8. Ozili, Peterson K, 2017. "Bank Loan Loss Provisions, Investor Protection and the Macroeconomy," MPRA Paper 80147, University Library of Munich, Germany.
    9. Bouvatier, Vincent & Lepetit, Laetitia, 2012. "Provisioning rules and bank lending: A theoretical model," Journal of Financial Stability, Elsevier, vol. 8(1), pages 25-31.
    10. Ozili, Peterson K, 2018. "Bank Loan Loss Provisions, Investor Protection and the Macroeconomy," MPRA Paper 80281, University Library of Munich, Germany.
    11. repec:lan:wpaper:68464009 is not listed on IDEAS
    12. Wahyoe Soedarmono & Sigid Eko Pramono & Amine Tarazi, 2016. "The procyclicality of loan loss provisions in Islamic banks: Do managerial discretions matter?," Working Papers hal-01281151, HAL.
    13. Ali, Ashraf & M. Kabir, Hassan & Syed Abul, Basher, 2015. "Loan Loss Provisioning in OIC Countries: Evidence from Conventional vs. Islamic Banks," MPRA Paper 61687, University Library of Munich, Germany.
    14. Ghosh Saibal, 2015. "Provisioning, Bank Behavior and Financial Crisis: Evidence from GCC Banks," Review of Middle East Economics and Finance, De Gruyter, vol. 11(3), pages 249-275, December.
    15. Malgorzata Olszak & Mateusz Pipien & Sylwia Roszkowska & Iwona Kowalska, 2014. "The effects of capital on bank lending in large EU banks – the role of procyclicality, income smoothing, regulations and supervision," Faculty of Management Working Paper Series 52014, University of Warsaw, Faculty of Management.

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    JEL classification:

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

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