Abstract

http://ssrn.com/abstract=2022644
 


 



Do Changes in the Timeliness of Loan Loss Recognition Affect Bank Risk Taking?


Manuel Illueca Muñoz


Universitat Jaume I

Lars Norden


Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Erasmus Research Institute of Management (ERIM)

Gregory F. Udell


Indiana University - Kelley School of Business - Department of Finance

March 14, 2012

AFA 2013 San Diego Meetings Paper

Abstract:     
Risk taking is the core of banks’ business and there is a clear intertemporal relationship between bank lending and loan losses. Therefore, banks are subject to various rules and regulations on risk measurement, risk reporting, and risk provisioning. In this paper we investigate the link between the timeliness of loan loss recognition and bank risk taking behavior. We take advantage of a natural experiment - the compulsory introduction of dynamic loan loss provisioning in the Spanish banking system in 2000 - to study changes in bank risk taking and the influence of bank governance after an exogenous change in bank accounting rules. Based on a large and representative matched bank-firm dataset we apply a difference-in-difference methodology to measure banks’ changes in the timeliness of loss recognition and risk taking between the pre- and post-adoption period. Our findings suggest that a) the timeliness of loan loss recognition increased after the new dynamic provisioning system became effective, and b) the banks’ appetite for risk subsequently decreased. A further analysis shows that the effects of the new accounting standard were stronger for banks with weaker governance (i.e. caja banks). Our study makes several contributions to the accounting, banking and finance literature and has implications for policy makers, accounting standard setters, and bank regulators.

Number of Pages in PDF File: 28

Keywords: banks, loan loss provisions, accounting conservatism, bank regulation, bank governance

JEL Classification: G21

working papers series


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Date posted: March 15, 2012  

Suggested Citation

Illueca Muñoz, Manuel and Norden, Lars and Udell, Gregory F., Do Changes in the Timeliness of Loan Loss Recognition Affect Bank Risk Taking? (March 14, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=2022644 or http://dx.doi.org/10.2139/ssrn.2022644

Contact Information

Manuel Illueca Muñoz (Contact Author)
Universitat Jaume I ( email )
Dep. Finance and Accounting
Campus del Riu Sec
Castellón de la Plana, E-12071
Spain
34964387135 (Phone)
Lars Norden
Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )
P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands
+31 10 408 2807 (Phone)
+31 10 408 9017 (Fax)
HOME PAGE: http://www.rsm.nl
Erasmus Research Institute of Management (ERIM) ( email )
P.O. Box 1738
3000 DR Rotterdam
Netherlands
Gregory F. Udell
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States

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