Using Loan Loss Indicators by Loan Type to Sharpen the Evaluation of Banks’ Loan Loss Accruals

50 Pages Posted: 3 Sep 2014 Last revised: 3 Sep 2020

See all articles by Gauri Bhat

Gauri Bhat

Southern Methodist University (SMU) - Accounting Department

Joshua A. Lee

Brigham Young University

Stephen G. Ryan

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

Date Written: August 2020

Abstract

Prior research acknowledges that the determinants, timeliness, and economic implications of banks’ provisions for loan losses (PLL) vary across loan types. However, the lack of machine-readable data on PLL by loan type has precluded researchers from incorporating loan type into the evaluation of PLL beyond either controlling for or partitioning the sample on crude proxies for loan portfolio composition. We calculate PLL by loan type as the change in the allowance for loan losses by loan type, which we hand collect from Form 10-K filings, plus net charge-offs by loan type, which we obtain from regulatory filings. Using these data, we show that prior findings that banks exercise discretion over PLL to smooth earnings and increase regulatory capital are driven by commercial loans, a thin slice of banks’ loan portfolios, and that commonly used measures of PLL timeliness vary substantially across loan types.

Keywords: provision for loan losses; disaggregation; disclosure; timeliness.

JEL Classification: G21, G28, M41, M48

Suggested Citation

Bhat, Gauri and Lee, Joshua A. and Ryan, Stephen G., Using Loan Loss Indicators by Loan Type to Sharpen the Evaluation of Banks’ Loan Loss Accruals (August 2020). Available at SSRN: https://ssrn.com/abstract=2490670 or http://dx.doi.org/10.2139/ssrn.2490670

Gauri Bhat (Contact Author)

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-7682964 (Phone)

Joshua A. Lee

Brigham Young University ( email )

United States
801-422-3154 (Phone)

HOME PAGE: http://https://marriottschool.byu.edu/directory/details?id=37414

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)

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