Loan Loss Provisions and Bank Lending Behavior: Do Information Sharing, Strength of Legal Rights and Bank Size Matter?
55 Pages Posted: 23 May 2016 Last revised: 17 Apr 2018
Date Written: March 31, 2018
We examine the roles of information sharing, strength of legal rights and bank size on the procyclical effect of bank loan loss provisions in an emerging Asian market context. Based on a sample of Asian banks from 11 countries over the 2002-2012 period, our empirical results indicate that higher non-discretionary loan loss provisions reduce loan growth; therefore, non-discretionary provisions are procyclical. A closer investigation suggests that better information sharing through public credit registries managed by central banks, not private credit bureaus managed by the private sector, might substitute for the role of dynamic provisioning systems in mitigating the procyclicality of non-discretionary provisions. We also document that higher discretionary provisions in countries with stronger legal rights for lenders and borrowers that reduce uncertainty in collateral values, temper the procyclical effect of non-discretionary provisions. However, these findings hold only for small banks. This suggests that the implementation of dynamic provisioning systems to mitigate the procyclicality of non-discretionary provisions is more crucial for large banks regardless of country-specific credit market environments.
Keywords: Loan loss provisions, Loan growth, Information sharing, Legal rights, Procyclical
JEL Classification: G10, G14, G21, G28
Suggested Citation: Suggested Citation