Timing of Banks' Loan Loss Provisioning During the Crisis

34 Pages Posted: 7 Jun 2016

See all articles by Leo de Haan

Leo de Haan

De Nederlandsche Bank

Maarten R.C. van Oordt

Government of Canada - Bank of Canada

Date Written: June 2, 2016

Abstract

We estimate a panel error correction model for loan loss provisions, using unique supervisory data on flow of funds into and out of the allowance for loan losses of 25 Dutch banks in the post-2008 crisis period. We find that these banks aim for an allowance of 49% of impaired loans. In the short run, however, the adjustment of the allowance is only 29% of the change in impaired loans. The deviation from the target is made up by (a) larger additions to allowances in subsequent quarters and (b) smaller reversals of allowances when loan losses do not materialize. After one quarter, the adjustment toward the target level is 34%, and after four quarters is 81%. For individual banks, there are substantial differences in timing of provisioning for bad loan losses. We present two model-based metrics that inform supervisors on the extent to which banks’ short-term provisioning behaviour is out of sync with their target levels.

Keywords: Loan loss provisioning, Impairments, Financial institutions, Supervision, Crisis

JEL Classification: G01, G21, G32

Suggested Citation

de Haan, Leo and van Oordt, Maarten R.C., Timing of Banks' Loan Loss Provisioning During the Crisis (June 2, 2016). De Nederlandsche Bank Working Paper No. 513. Available at SSRN: https://ssrn.com/abstract=2791356 or http://dx.doi.org/10.2139/ssrn.2791356

Leo de Haan (Contact Author)

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands
+31 20 5243539 (Phone)
+31 20 5242514 (Fax)

Maarten R.C. Van Oordt

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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