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

See all articles by Wahyoe Soedarmono

Wahyoe Soedarmono

Sampoerna University - Faculty of Business

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Agusman Agusman

Bank Indonesia

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business

Dominic Gasbarro

Murdoch University

Date Written: March 31, 2018

Abstract

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

Soedarmono, Wahyoe and Tarazi, Amine and Agusman, Agusman and Monroe, Gary S. and Gasbarro, Dominic, Loan Loss Provisions and Bank Lending Behavior: Do Information Sharing, Strength of Legal Rights and Bank Size Matter? (March 31, 2018). Available at SSRN: https://ssrn.com/abstract=2782707 or http://dx.doi.org/10.2139/ssrn.2782707

Wahyoe Soedarmono (Contact Author)

Sampoerna University - Faculty of Business ( email )

Jl. Raya Pasar Minggu, Kav. 16
Jakarta, Pancoran 12780
Indonesia

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

Agusman Agusman

Bank Indonesia ( email )

Jl. M.H.Thamrin No.2
Jakarta, 10350
Indonesia
62-21-3818075 (Phone)
62-21-3518629 (Fax)

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
+61293856443 (Phone)

Dominic Gasbarro

Murdoch University ( email )

South Street
Murdoch 6150, Western Australia
Australia

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