Loan loss provisioning and economic slowdowns: too much too late?

By Luc Laeven, G. Majnoni. 2002

429 citations recorded by the source corpus.

Only recently the debate on bank capital regulation has devoted specific attention to the role that bank loan loss provisions can play as a part of the overall minimum capital regulatory framework. Several national regulators have adopted or are planning to introduce a cyclically adjustable requirement for loan loss provisions and the Basel Committee on Banking Supervision is considering how to address provisioning practices within a broad bank capital regulatory framework. This paper contributes to the ongoing debate by exploring the available evidence about bank loan loss provisioning around the world. We find that many banks tend to delay provisioning for bad loans until too late, when cyclical downturns have already set in, possibly magnifying the impact of the economic cycle on banks' income and capital. At the same time, we find a considerable difference in patterns followed by banks around the world.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/4fa568564c4d5968fbc04eb3968952b3f0dc1a87

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Citations in the corpus

Bank provisioning behaviour and procyclicality (2005, methodology): “This cyclical bank behaviour is reported by e.g. Laeven and Majnoni (2002) and Bikker and Hu 5 (2002).”
Income smoothing among European systemic and non-systemic banks (2018, methodology): “(3) Following the approach of Laeven and Majnoni (2003) and Fonseca and Gonzalez (2008), the model is estimated using the GMM first-difference dynamic panel estimator based on Arellano and Bond (1991).”
Collectivism and corruption in bank lending (2013, positive): “In addition to CLT, we control for bank- and country-level determinants of loan quality following Laeven and Majnoni (2003): 1) Bank_size, the natural logarithm of bank total assets in U.S. dollars; 2) Loan_growth, the growth rate of total loans in U.S. dollars; 3) Profitability, earnings before…”
Bank Income Smoothing, Ownership Concentration and the Regulatory Environment (2014, positive): “The non-discretionary component represents loan loss provisions made to cover expected credit losses (Wahlen 1994, Beaver and Engel 1996, Hasan and 11 Wall 2004) and exhibits a cyclical pattern (Laeven and Majnoni 2003, Bikker and Metzemakers 2005).”
Factors influencing bank risk in Europe: Evidence from the financial crisis (2015, background): “The Z-score is considered a better measure of bank risk than the NPLr because non-performing loans are traditionally backward looking and highly procyclical (Laeven and Majnoni, 2003; Bikker and Metzemakers, 2005).”
Estimating the technical and scale efficiency of Greek commercial banks: The impact of credit risk, off-balance sheet activities, and international operations (2008, background): “However, Laeven and Majnoni (2003) mention that risk should be incorporated into efficiency studies via the inclusion of loan loss provisions that is actually a cost required to build up loan loss reserves.”
Business and default cycles for credit risk (2003, background): “3 in a credit crunch and thus worsen already adverse economic conditions, see Laeven and Majnoni (2002).”
Earnings and capital management and signaling: the use of loan-loss provisions by European banks (2015, background): “Consequently, we do not find evidence of banks’pro-cyclical behavior, which was already pointed out in previous empirical evidence, such as Laeven and Majnoni (2003), Bikker and Metzemakers (2005), Bouvatier and Lepetit (2008), and Fonseca and González (2008).”
Banking stability determinants in Africa (2018, positive): “Loan defaults tend to be lower during periods of high economic growth, which consequently has positive effects for banking sector stability (Laeven and Majnoni, 2003); therefore, we expect a positive relationship between banking sector stability and economic growth.”
Bank Loan Loss Provisions Research: A Review (2017, methodology): “A growing literature focus on the behaviour of LLPs during fluctuating economic conditions, and argue that LLPs are procyclical because it reinforces the current state of the economy (Bikker & Hu, 2002; Laeven & Majnoni, 2003; Bikker & Metzemakers, 2005; Bouvatier and Lepetit, 2008).”
The Impact of Non-performing Loans on Bank Lending Behavior: Evidence from the Italian Banking Sector (2015, methodology): “Laeven and Majnoni (2003) analyzed data from 45 countries to investigate factors influencing loan loss provisioning and income smoothing by banks during the period 1988–1999.”
Accounting Discretion, Loan Loss Provisioning and Discipline of Banks' Risk-Taking (2012, positive): “…current losses are low, and a reserve draw down in future periods when earnings are low and current loan losses are high (e.g., Borio et al., 2001; Laeven and Majnoni, 2003; Bikker and Metzemakers, 2004).7 However, providing more discretion to smooth provisions permits opportunistic earnings…”
Earnings and Capital Management in Alternative Loan Loss Provision Regulatory Regimes (2006, neutral): “Laeven and Majnoni (2003) link this provision with the cyclical oscillations of bank reserves proposed by Holmstrom and Tirole (2000).”
Bank modelling methodologies: A comparative non-parametric analysis of efficiency in the Japanese banking sector (2009, methodology): “McKillop et al. (1996) used the composite cost function developed by Pulley and Braunstein (1992) to analyse costs and efficiency in giant Japanese banks.”