Countercyclical Prudential Buffers and Bank Risk-taking

52 Pages Posted: 15 Mar 2012 Last revised: 17 Mar 2020

See all articles by Manuel Illueca Muñoz

Manuel Illueca Muñoz

Universitat Jaume I

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE); Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Joseph Pacelli

Indiana University - Kelley School of Business - Department of Accounting

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

Date Written: March 16, 2020

Abstract

We investigate the effects of countercyclical prudential buffers on bank risk-taking. We exploit the introduction of dynamic loan loss provisioning in Spain, mandating that banks use historical average loss rates in their estimation of loan loss provisions. We find that dynamic loan loss provisioning is associated with reductions in timely loan loss provisioning. Banks that previously recognized loan losses in a timely fashion exhibit the greatest reductions in timeliness and consequently extend loans to riskier borrowers with lower accounting quality. Our results have policy implications for the debate on the use of financial reporting requirements in mitigating capital pro-cyclicality.

Keywords: Banks, bank regulation, macro-prudential policy, bank lending, risk taking

JEL Classification: G21, G28, G32, M41

Suggested Citation

Illueca Muñoz, Manuel and Norden, Lars and Pacelli, Joseph and Udell, Gregory F., Countercyclical Prudential Buffers and Bank Risk-taking (March 16, 2020). Available at SSRN: https://ssrn.com/abstract=2022644 or http://dx.doi.org/10.2139/ssrn.2022644

Manuel Illueca Muñoz

Universitat Jaume I ( email )

Dep. Finance and Accounting
Campus del Riu Sec
Castellón de la Plana, E-12071
Spain
34964387135 (Phone)

Lars Norden (Contact Author)

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Joseph Pacelli

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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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