Policy Uncertainty and Loan Loss Provisions in the Banking Industry

Review of Accounting Studies, Forthcoming

71 Pages Posted: 12 Oct 2017 Last revised: 29 Oct 2019

See all articles by Jeffrey Ng

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Walid Saffar

Hong Kong Polytechnic University - School of Accounting and Finance

Janus Jian Zhang

Hong Kong Baptist University (HKBU) – Department of Accountancy and Law

Date Written: October 2019

Abstract

Policy uncertainty (PU) is an increasingly important issue in many economies. Extensive evidence indicates that higher PU is associated with future negative macroeconomic and microeconomic conditions. In this paper, we examine how PU affects banks’ accruals for loan losses. Consistent with banks signaling more expected loan losses, we document that in times of higher PU, banks make more loan loss provisions. This positive association is more pronounced for banks that were previously less prudent in their risk-taking and loan loss reserving, indicating that less prudent banks are more adversely affected by loan losses in difficult times. We also show that higher attention paid to a banks’ financial reporting strengthens the role of loan loss provisions as a signal of expected loan losses. Overall, our paper offers insight into how, in the face of PU, banks convey information about their loan portfolios to their stakeholders.

Keywords: Policy Uncertainty; Accrual Estimates; Banking; Loan Loss Provisions; Earnings Management

JEL Classification: G21; M41; G32

Suggested Citation

Ng, Jeffrey and Saffar, Walid and Zhang, Janus Jian, Policy Uncertainty and Loan Loss Provisions in the Banking Industry (October 2019). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3051494 or http://dx.doi.org/10.2139/ssrn.3051494

Jeffrey Ng (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Walid Saffar

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Li Ka Shing Tower
Hong Hum
Kowloon
Hong Kong

Janus Jian Zhang

Hong Kong Baptist University (HKBU) – Department of Accountancy and Law ( email )

Hong Kong

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