Do Banks Provision for Bad Loans in Good Times? Empirical Evidence and Policy Implications
Recent debate about the pro-cyclical
effects of bank capital requirements, has ignored the
important role that bank loan loss provisions play in the
overall framework of minimum capital regulation. It is
frequently observed that under-provisioning, due to
inadequate assessment of expected credit losses, aggravates
the negative effect of minimum capital requirements during
recessions, because capital must absorb both expected, and
unexpected losses. Moreover, when expected losses are
properly reflected in lending rates, but not in provisioning
practices, fluctuations in bank earnings magnify true
oscillations in bank profitability. The relative agency
problems faced by different stakeholders, may help explain
the prevailing, and often unsatisfactory institutional
arrangements. The authors test their hypotheses with a
sample of 1,176 large commercial banks - 372 of them in
non-G10 countries - for the period 1988-99. After
controlling for different country-specific macroeconomic,
and institutional features, they find robust evidence among
G10 banks, of a positive association between loan loss
provisions, and banks' pre-provision income. Such
evidence is not confirmed for non-G10 banks, which on
average, provision too little in good times, and are forced
to increase provisions in bad times. The econometric
evidence shows that the protection of outsiders' claims
- the claims of minority shareholders in common law
countries, and of fiscal authorities in countries with high
public debt - on bank income, has negative effects on the
level of bank provisions.
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Bibliographic Details
| Main Authors: |
Cavallo, Michele,
Majnoni, Giovanni |
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| Language: | English
en_US |
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| Published: |
World Bank, Washington, DC
2001-06
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| Subjects: | ACCOUNTING PRACTICES,
ACCOUNTING PROCEDURES,
ACCOUNTING RULES,
ACCOUNTING TREATMENT,
AGENCY PROBLEMS,
ANNUAL ACCOUNTS,
ASSETS,
ASYMMETRIC INFORMATION,
BALANCE SHEET,
BALANCE SHEETS,
BANK CAPITAL,
BANK CAPITAL REGULATION,
BANK DEPOSITS,
BANK EARNINGS,
BANK LENDING,
BANK LIQUIDITY,
BANK LOANS,
BANK REGULATION,
BANKING SECTOR,
BANKING SUPERVISION,
BANKING SYSTEM,
BANKS,
CAPITAL REGULATION,
CAPITAL REQUIREMENT,
CAPITAL REQUIREMENTS,
COMMERCIAL BANKS,
COMPULSORY RESERVES,
CONSOLIDATION,
COST OF CAPITAL,
CREDIT RISK,
DEPOSITS,
DIVIDEND POLICY,
DIVIDENDS,
ECONOMETRIC EVIDENCE,
ECONOMICS,
EXPECTED VALUES,
FINANCIAL INSTITUTIONS,
FINANCIAL INTERMEDIATION,
FINANCIAL REGULATION,
FINANCIAL SECTOR,
FINANCIAL STABILITY,
FISCAL DEFICITS,
GDP,
GOVERNMENT BONDS,
GROWTH RATE,
INCOME,
INCOME STATEMENTS,
INCOME TAXES,
INSTITUTIONAL DEVELOPMENT,
INTEREST INCOME,
INTEREST RATE,
LEGAL PROVISIONS,
LOAN CLASSIFICATION,
LOAN LOSS PROVISIONS,
LOSS RATIO,
MARKET DISCIPLINE,
OPERATING COSTS,
OPERATING INCOME,
PORTFOLIO,
PORTFOLIO DIVERSIFICATION,
PORTFOLIOS,
PREMIUMS,
PRESENT VALUE,
PROFIT MAXIMIZATION,
PROFITABILITY,
PROVISIONING,
PRUDENTIAL REGULATIONS,
PUBLIC DEBT,
PUBLIC FINANCE,
PUBLIC OWNERSHIP,
RATES,
REGULATORY FRAMEWORK,
RESERVES,
RETAINED EARNINGS,
RISK MANAGEMENT,
RISK MEASUREMENT,
RISK PREMIUM,
SHAREHOLDERS,
SOLVENCY,
SUBSIDIARY,
TAX,
TAX INCENTIVES,
TAX REVENUES,
TAXATION,
TAXES,
TRANSPARENCY,
WRITE OFFS, |
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| Online Access: | http://documents.worldbank.org/curated/en/2001/06/1490107/banks-provision-bad-loans-good-times-empirical-evidence-policy-implications
https://hdl.handle.net/10986/19607
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