Ozili, Peterson K (2015): Credit Smoothing and Determinants of Loan Loss Reserves. Evidence from Europe, US, Asia and Africa.
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Abstract
This study provides a link between accounting, managerial discretion and monetary policy. Monetary authorities encourage banking institutions to supply credit to the economy. Increased bank supply of credit is a good thing but too much of a good can be a bad thing. This paper investigates under what circumstances excessive loan supply ceases to be a good thing and how bank managers react to this. After examining 82 bank samples, I find that (i) bank underestimate the level of reserves to boost credit supply in line with expectations of monetary authorities, particularly, in Asia and UK (ii) consistent with the credit smoothing hypothesis, US and Chinese banks smooth credit supply to minimize unintended stock market signaling; (iii) managerial priority during a recession is to smooth credit over time rather than to boost credit supply; (iv) non-performing loans, bank portfolio risk and loan portfolio size are significant determinants of the level of loan loss reserves; and (v) credit risk, proxy by loan growth, do not have a significant impact on loan loss reserves but tend to have some significant effect during a recession, particularly, when change in loans is negative. The implications of these findings are two-fold: (i) bank managers use their discretion over reserves to influence bank credit supply; (ii) bank supply of credit is not solely driven by loan demand but by a combination of several factors, particularly, capital market concerns, the need to avoid scrutiny from monetary authorities, and country-specific factors.
| Item Type: | MPRA Paper |
|---|---|
| Original Title: | Credit Smoothing and Determinants of Loan Loss Reserves. Evidence from Europe, US, Asia and Africa |
| Language: | English |
| Keywords: | Credit Risk, Monetary Policy, Loan Loss Reserves, Credit Smoothing, Accounting, Signaling, Bank supervision. |
| Subjects: | E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting |
| Item ID: | 63296 |
| Depositing User: | Dr Peterson K Ozili |
| Date Deposited: | 29 Mar 2015 12:57 |
| Last Modified: | 26 Sep 2019 17:35 |
| References: | Ahmed, A.S., Takeda, C. and Thomas, S. (1999). Bank loan loss provisions: A reexamination of capital management, earnings management and signaling effects. Journal of Accounting and Economics 28: 1-25. Beaver, W and Engel, E. (1996). Discretionary behavior with respect to allowance for loan losses and the behavior of security prices. Journal of Accounting and Economics, 22: 177-206 Bhat, V.N (1996) Banks and income smoothing: an empirical analysis, Applied Financial Economics, 6:6, 505-510 Bikker, J. A., & Metzemakers, P. A. (2005). Bank provisioning behaviour and procyclicality. Journal of International Financial Markets, Institutions and Money, 15(2), 141-157. Cavallo, M., and Majnoni, G. (2002). Do banks provision for bad loans in good times? Empirical Evidence and PolicyIimplications. Springer: 319-342. Curcio, D., and Hasan, I. (2013). Earnings and capital management and signaling: the use of loan-loss provisions by European banks. The European Journal of Finance, (ahead-of-print), 1-25. El Sood, H., A. (2012). Loan loss provisions and income smoothing in US banks pre and post the financial crisis. International Review of Financial Analysis, 25:64-72 Floro, D. (2010). Loan Loss Provisioning and the Business Cycle: Does Capital Matter? Evidence from Philippine Banks. Bank for International Settlements Research Paper. Foos, D., L. Norden, and M. Weber. 2009. “Loan Growth and Riskiness of Banks” Working Paper, University of Mannheim. Hasan, I. and Wall, L. D. (2004). Determinants of the Loan Loss Allowance: Some Cross‐Country Comparisons. Financial review, 39 (1), 129-152. Laeven, C and Majnoni, G. (2003). Loan loss provisioning and economic slowdowns: too much, too late? Journal of Financial Intermediation, 12: 178-197. Liu, C., and Ryan, S. (1995). The effect of bank loan portfolio composition on the market reaction to and anticipation of loan loss provisions. Journal of Accounting Research, 33 (1), 77-94. Lobo, G.J. and Yang, D.H. (2001). Bank managers' heterogeneous decisions on discretionary loan loss provisions. Review of Quantitative Finance and Accounting, 16 (3): 223-250. Kanagaretnam, K., Lobo, G.J and Mathieu, R. (2003). Managerial Incentives for Income Smoothing through Bank Loan Loss Provisions, Review of Quantitative Finance and Accounting, 20: 63-80 Kanagaretnam, K, Lobo, G. J., and Yang, D. (2004). Joint tests of signaling and income smoothing through bank loan loss provisions, Contemporary Accounting Research, 21 (4): 843-884 Ozili, P. K. (2015). Loan Loss Provisioning, Income Smoothing, Signaling, Capital Management and Procyclicality: Does IFRS Matter? Empirical Evidence from Nigeria, Mediterranean Journal of Social Sciences, 6 (2): 224-232. |
| URI: | https://mpra.ub.uni-muenchen.de/id/eprint/63296 |
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Credit Smoothing and Determinants of Loan Loss Reserves. Evidence from Europe, US, Asia and Africa. (deposited 08 Mar 2015 08:24)
- Credit Smoothing and Determinants of Loan Loss Reserves. Evidence from Europe, US, Asia and Africa. (deposited 29 Mar 2015 12:57) [Currently Displayed]
- Credit Smoothing and Determinants of Loan Loss Reserves. Evidence from Europe, US, Asia and Africa. (deposited 29 Mar 2015 06:11)
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