Are Banks Forward-Looking in Their Loan Loss Provisioning? Evidence from the Senior Loan Officer Opinion Survey (SLOOS)

68 Pages Posted: 15 Sep 2013 Last revised: 29 Oct 2014

See all articles by Lakshmi Balasubramanyan

Lakshmi Balasubramanyan

Case Western Reserve University - Weatherhead School of Management

Saeed Zaman

Federal Reserve Banks - Federal Reserve Bank of Cleveland

James B. Thomson

Federal Reserve Bank of Cleveland

Date Written: October 11, 2014

Abstract

This paper makes a fundamental contribution by studying loan-loss provisioning over the credit cycle as three distinct phases. Looking at the three distinct phases of the financial crisis — the pre-crisis period, crisis period, and post-crisis period — is important as loan-loss provisioning is driven by different factors in each, in part due to extensive shifts in (or in the application of) regulatory rule. We show evidence of forward-looking loan-loss provisioning by utilizing Senior Loan Officer Opinion Surveys (SLOOS), which provide useful controls for credit cycle information. Though the SLOOS dataset is a restricted sample and generalizability to a broader sample could potentially be a stretch, we control for credit cycle factors as part of an identification strategy to sort out changes in the credit market equilibrium. We contribute to the growing literature on forward-looking loan-loss provisioning and early-in-the-cycle loss recognition by incorporating a broader range of available credit information.

Keywords: Loan loss provisioning, forward-looking, income smoothing, capital management, early loss recognition

JEL Classification: G21, G28

Suggested Citation

Balasubramanyan, Lakshmi and Zaman, Saeed and Thomson, James B., Are Banks Forward-Looking in Their Loan Loss Provisioning? Evidence from the Senior Loan Officer Opinion Survey (SLOOS) (October 11, 2014). FRB of Cleveland Working Paper No. 13-13r. Available at SSRN: https://ssrn.com/abstract=2325621

Lakshmi Balasubramanyan (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Saeed Zaman

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

James B. Thomson

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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