Do Delays in Expected Loss Recognition Affect Banks' Willingness to Lend?

By Anne L. Beatty, Scott Liao. 2011

494 citations recorded by the source corpus.

Banks can decrease their future capital inadequacy concerns by reducing lending. The capital crunch theory predicts that lending is particularly sensitive to regulatory capital constraints during recessions, when regulatory capital declines and external-financing frictions increase. Regulators and policy makers argue that the current loan loss provisioning rules magnify this pro-cyclicality. Exploiting variation in the delay in expected loss recognition under the current incurred loss model, we find that reductions in lending during recessionary relative to expansionary periods are lower for banks that delay less. We also find that smaller delays reduce the recessionary capital crunch effect. These results hold across management quality partitions.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/0a96a89dd46691e673930a93ad496eb8a0f81e10

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Citations in the corpus

Do financial technology firms influence bank performance? (2020, methodology): “To proxy credit risk, we use LLP, a variable considered a reserve to cover for any potential loans default, which protects bank positions in terms of profitability and capital (Beatty and Liao, 2011).”
Accounting Discretion, Loan Loss Provisioning and Discipline of Banks' Risk-Taking (2012, unknown): “See Beatty and Liao (2011) for recent evidence in this regard.”
Bank liquidity creation and risk-taking: : Does managerial ability matter? (2016, unknown): “Finally, Beatty and Liao (2011) find that more ably managed banks forecast loan losses better and thus recognize these earlier.”
Earnings management behaviors under different monitoring mechanisms: The case of Islamic and conventional banks (2016, methodology): “Although the Nichols et al. (2009) model requires continuous time-series data, which constrains the sample size (Beatty and Liao, 2011), it is the most appropriate research design for measuring conservatism in the banking industry (Leventis et al., 2013).”
The Interaction of the IFRS 9 Expected Loss Approach with Supervisory Rules and Implications for Financial Stability (2016, unknown): “37 See for an overview Bushman (2016). 38 However, it should be noted that expected bail-outs, too-big-to-fail status etc. can severely undermine market participants’ incentives to discipline banks. See e.g. Rochet (2005); Stephanou (2010).”
Bank Competition: Measurement, Decision-Making, and Risk-Taking: BANK COMPETITION (2016, unknown): “To capture the timeliness of loan provisions in a single proxy, we follow Beatty and Liao (2011) and use loan loss allowance divided by non-performing loans (TimelyLLP).”
Delayed Expected Loss Recognition and the Risk Profile of Banks: delayed loss recognition and the risk profile of banks (2015, unknown): “Supporting arguments made by Gambera (2000), Beatty and Liao (2011) show that both current and next period's changes in nonperforming loans are positively correlated with current and lagged unemployment and negatively correlated with current and lagged industrial production.”
Do loan loss reserves behave like capital? Evidence from recent bank failures (2014, unknown): “In a recent study, Beatty and Liao (2011) suggest that more conservative loan loss provisioning practices are beneficial for banks in that they reduce the sensitivity of lending to the regulatory capital ratio during recessionary periods.”
The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis: THE EFFECT OF ACCOUNTING CONSERVATISM (2016, unknown): “Beatty and Liao (2011) examine how heterogeneity in accounting practices across banks affects their ability to lend during recession periods.”
Policy uncertainty and loan loss provisions in the banking industry (2020, unknown): “Beatty and Liao (2011) is a closely related study that finds that reductions in lending during recessionary periods are smaller when banks have previously been more timely in recognizing loan losses.”