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http://ssrn.com/abstract=2192586
 
 

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The Effects of Credit Competition on Banks’ Loan Loss Provisions


Yiwei Dou


New York University (NYU) - Department of Accounting, Taxation & Business Law

Stephen G. Ryan


New York University (NYU) - Leonard N. Stern School of Business

Youli Zou


George Washington University - Department of Accountancy

November 12, 2014


Abstract:     
We exploit variation in interstate branching deregulation across contiguous counties of adjacent states from 1994 to 2005 as a natural experiment to investigate how increased threat of entry affects incumbent banks’ reported loan loss provisions. We argue that these provisions shape the perception of potential entrants into a local loan origination market about incumbents’ loan underwriting quality and thus the desirability of market entry. By loan underwriting quality, we mean banks’ ability to evaluate credit risk to determine which loans to grant as well as the interest rates and other contractual terms of granted loans. We predict that, when deregulation eased restrictions on entry in a state, incumbents had increased incentive to record lower loan loss provisions to appear to have better loan underwriting quality and thus fewer available profitable lending opportunities for potential entrants. Consistent with this prediction, we find that incumbents more subject to entry record lower provisions. We further predict and find and that this behavior is more pronounced in loan origination markets with higher bank concentration, more unsatisfied loan demand, and a higher proportion of commercial loans, which incumbents typically originate based on soft information obtained from relationship lending and local market knowledge.

Number of Pages in PDF File: 50

Keywords: banks, deregulation, interstate branching, credit competition, loan loss provision, loan underwriting quality, natural experiment

JEL Classification: G21, L10, L89, M41

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Date posted: December 22, 2012 ; Last revised: November 13, 2014

Suggested Citation

Dou, Yiwei and Ryan, Stephen G. and Zou, Youli, The Effects of Credit Competition on Banks’ Loan Loss Provisions (November 12, 2014). Available at SSRN: http://ssrn.com/abstract=2192586 or http://dx.doi.org/10.2139/ssrn.2192586

Contact Information

Yiwei Dou (Contact Author)
New York University (NYU) - Department of Accounting, Taxation & Business Law ( email )
40 West 4th Street
New York, NY 10012
United States
Stephen G. Ryan
New York University (NYU) - Leonard N. Stern School of Business ( email )
44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)
212-995-4004 (Fax)
Youli Zou
George Washington University - Department of Accountancy ( email )
School of Business and Public Management
Washington, DC 20052
United States
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