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Journal of Financial Services Research

Erschienen in:

14.07.2016

Evidence of Forward-Looking Loan Loss Provisioning with Credit Market Information

verfasst von: Lakshmi Balasubramanyan, James B. Thomson, Saeed Zaman

Erschienen in: Journal of Financial Services Research | Ausgabe 3/2017

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Abstract

Our paper makes a fundamental contribution by studying loan loss provisioning over the credit cycle as three distinct phases. Looking at the three distinct phases of the financial crisis – the pre-crisis period, crisis period, and post-crisis period – is important as loan loss provisioning is driven by different factors in each, in part due to extensive shifts in (or in the application of) regulatory rule. Controlling for credit market information using data from the Senior Loan Officer Opinion Surveys (SLOOS) we extend the work of previous studies of forward-looking loan loss provisions using the delayed expected loss recognition approach. We contribute to the growing literature on forward-looking loan loss provisioning and early in the cycle loss recognition by incorporating a broader range of available credit information and explicitly controlling for structural breaks in the sample corresponding to the financial crisis.

Vorheriger Artikel Board Accountability and Risk Taking in Banking: Evidence from a Quasi-Experiment

Nächster Artikel Foreclosure Delay and Consumer Credit Performance

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See Wall and Koch (2000) and Wall and Benston (2005) for a discussion of the different factors involved in bank loan loss accounting decisions.

Bushman and Williams (2011) provide evidence that the ability of banks to delay expected loss recognition may be a source of systemic risk in the banking system as it reduces the ability of banks to absorb negative shocks and leads to greater opacity of earnings, which in turn weakens market discipline.

Refer to Leventis et al. (2011)

We thank the anonymous reviewer for this point. .

Also refer to Balla and Rose (2009); Balla et al. 2012).

The SLOOS survey covers four general areas of lending: commercial real estate, commercial and industrial, home mortgage, and consumer loans. Consumer lending is further broken down into subcategories such as auto loans and credit cards. Unfortunately, differences in the breakdowns in consumer loans on the SLOOS and on the Call Reports made matching for consumer loans problematic for us. Hence, the consumer lending category was dropped from our sample. Of the three categories used in our analysis, the average of the fraction of C&I loans in the loan portfolio is about 35 %. The average for CRE and Home loans are 30, and 35 % respectively.

We thank an anonymous reviewer for this insight.

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Titel: Evidence of Forward-Looking Loan Loss Provisioning with Credit Market Information
verfasst von: Lakshmi Balasubramanyan
James B. Thomson
Saeed Zaman
Publikationsdatum: 14.07.2016
Verlag: Springer US
Erschienen in: Journal of Financial Services Research / Ausgabe 3/2017
Print ISSN: 0920-8550
Elektronische ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-016-0255-0

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