Conditional Accounting Conservatism and Bank Risk Taking
41 Pages Posted: 15 Mar 2012 Last revised: 2 Feb 2016
Date Written: February 1, 2016
We investigate the effect of an exogenous change in loan loss provisioning rules on bank risk taking. To identify the effect we exploit that only banks with a high conditional accounting conservatism (CAC) in the pre-adoption period should respond to the change. We conduct a difference-in-differences analysis using a large sample of matched bank-firm data around the introduction of dynamic loan loss provisioning in Spain in 2000. The main result is that banks with a high CAC in the pre-adoption period significantly increased their risk taking in the post-adoption period. These banks lend significantly more to ex ante riskier borrowers, lend more to borrowers with lower accounting quality, and lend more to borrowers that exhibit higher loan growth. Our findings on bank risk taking are consistent with reduced screening and monitoring incentives and highlight unintended effects of the change in the loan loss provisioning rules.
Keywords: Banks, loan loss provisions, bank regulation, bank lending, timeliness of loss recognition
JEL Classification: G21, G28, G32, M41
Suggested Citation: Suggested Citation