The Effect of Credit Competition on Banks’ Loan Loss Provisions

52 Pages Posted: 22 Dec 2012 Last revised: 23 Apr 2017

Yiwei Dou

New York University (NYU) - Department of Accounting

Stephen G. Ryan

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

Youli Zou

George Washington University - Department of Accountancy

Date Written: January 11, 2017

Abstract

Exploiting differential 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 entry threat have offsetting incentives; lower provisions make their loan underwriting quality appear better, deterring entry, while 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 that the other incentive dominates in counties with both few heterogeneous loans and highly volatile economic conditions.

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

JEL Classification: G21, L10, L89, M41

Suggested Citation

Dou, Yiwei and Ryan, Stephen G. and Zou, Youli, The Effect of Credit Competition on Banks’ Loan Loss Provisions (January 11, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2192586 or http://dx.doi.org/10.2139/ssrn.2192586

Yiwei Dou (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
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)

Youli Zou

George Washington University - Department of Accountancy ( email )

School of Business and Public Management
Washington, DC 20052
United States

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