Do Delays in Expected Loss Recognition Affect Banks' Willingness to Lend?

52 Pages Posted: 28 Aug 2009 Last revised: 31 Oct 2013

See all articles by Anne Beatty

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Scott Liao

University of Toronto - Rotman School of Management

Date Written: December 15, 2010

Abstract

Banks with low regulatory capital facing external-financing frictions may reduce lending to avoid a capital shortage. The capital crunch theory predicts that banks’ lending is particularly sensitive to their capital ratios during recessions. Procyclicality in bank lending may be magnified when banks’ loan loss provisioning is backward looking given the increase in loan defaults that occur during recessions. We find that, relative to more conservative banks, banks with less conservative loan loss provisions reduce their lending more during recessionary relative to expansionary periods. We also find that conservatism in loan loss provisioning reduces the capital crunch effect during recessionary periods.

Keywords: bank lending, loan loss provision, procyclicality, recession, accounting conservatism

JEL Classification: M41, E32

Suggested Citation

Beatty, Anne L. and Liao, Wei-Yi (Scott), Do Delays in Expected Loss Recognition Affect Banks' Willingness to Lend? (December 15, 2010). Available at SSRN: https://ssrn.com/abstract=1463374 or http://dx.doi.org/10.2139/ssrn.1463374

Anne L. Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Wei-Yi (Scott) Liao (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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