The Effect of Credit Competition on Banks’ Loan Loss Provisions
New York University (NYU) - Department of Accounting
Stephen G. Ryan
New York University (NYU) - Leonard N. Stern School of Business
George Washington University - Department of Accountancy
May 28, 2016
Using interstate branching deregulation across contiguous counties of adjacent states, we investigate the effect of entry threat on incumbent banks’ loan loss provisions. Incumbents exposed to threat have offsetting incentives to report provisions; lower provisions make incumbents’ loan underwriting quality appear better, deterring entry, but local economic conditions appear better, encouraging entry. We find that the incentive to increase apparent loan underwriting quality dominates on average. We further find that this incentive is stronger in counties with a higher proportion of heterogeneous loans, and the other incentive dominates in counties with both few heterogeneous loans and highly volatile economic conditions.
Number of Pages in PDF File: 48
Keywords: banks, deregulation, interstate branching, credit competition, loan loss provision, loan underwriting quality, natural experiment
JEL Classification: G21, L10, L89, M41
Date posted: December 22, 2012 ; Last revised: May 29, 2016
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