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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dig-okr-10986196072024-08-08T18:01:44Z Do Banks Provision for Bad Loans in Good Times? Empirical Evidence and Policy Implications Cavallo, Michele Majnoni, Giovanni 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 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. 2014-08-21T20:20:56Z 2014-08-21T20:20:56Z 2001-06 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 English en_US Policy Research Working Paper;No. 2619 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ application/pdf text/plain World Bank, Washington, DC |
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Banco Mundial |
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DSpace |
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Estados Unidos |
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US |
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Bibliográfico |
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En linea |
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dig-okr |
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biblioteca |
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America del Norte |
| libraryname |
Biblioteca del Banco Mundial |
| language |
English en_US |
| topic |
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 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 |
| spellingShingle |
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 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 Cavallo, Michele Majnoni, Giovanni Do Banks Provision for Bad Loans in Good Times? Empirical Evidence and Policy Implications |
| description |
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. |
| topic_facet |
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 |
| author |
Cavallo, Michele Majnoni, Giovanni |
| author_facet |
Cavallo, Michele Majnoni, Giovanni |
| author_sort |
Cavallo, Michele |
| title |
Do Banks Provision for Bad Loans in Good Times? Empirical Evidence and Policy Implications |
| title_short |
Do Banks Provision for Bad Loans in Good Times? Empirical Evidence and Policy Implications |
| title_full |
Do Banks Provision for Bad Loans in Good Times? Empirical Evidence and Policy Implications |
| title_fullStr |
Do Banks Provision for Bad Loans in Good Times? Empirical Evidence and Policy Implications |
| title_full_unstemmed |
Do Banks Provision for Bad Loans in Good Times? Empirical Evidence and Policy Implications |
| title_sort |
do banks provision for bad loans in good times? empirical evidence and policy implications |
| publisher |
World Bank, Washington, DC |
| publishDate |
2001-06 |
| url |
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 |
| work_keys_str_mv |
AT cavallomichele dobanksprovisionforbadloansingoodtimesempiricalevidenceandpolicyimplications AT majnonigiovanni dobanksprovisionforbadloansingoodtimesempiricalevidenceandpolicyimplications |
| _version_ |
1807154371532685312 |