Asymmetric Loan Loss Provisioning

55 Pages Posted: 2 Apr 2019

See all articles by Sudipta Basu

Sudipta Basu

Temple University - Department of Accounting

Justin Vitanza

Temple University - Department of Finance

Wei Wang

Temple University - Fox School of Business

Date Written: March 7, 2019

Abstract

Banks’ loan loss provisions have a V-shaped relation with changes in loan portfolio quality, i.e., decreases in nonperforming loans are associated with increases in loan loss provisions. The accounting for loan charge-offs partly explains this asymmetry. We argue that the residual asymmetry is caused by conditional conservatism. Loan loss provision asymmetry is greater for banks with more high-risk construction loans, shorter-maturity loans and for public banks, and is more pronounced during economic downturns and in the fourth quarter, consistent with the predictable effects of conditional conservatism. Modeling this asymmetry changes inferences from prior banking research that incorrectly assumed linearity.

Keywords: loan collectibility, loan duration, recession, impairment, conditional conservatism

JEL Classification: G21, G28, M41, M48

Suggested Citation

Basu, Sudipta and Vitanza, Justin and Wang, Wei, Asymmetric Loan Loss Provisioning (March 7, 2019). Available at SSRN: https://ssrn.com/abstract=3349530 or http://dx.doi.org/10.2139/ssrn.3349530

Sudipta Basu (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

Justin Vitanza

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

Wei Wang

Temple University - Fox School of Business ( email )

Alter Hall 450
1801 Liacouras Walk
Philadelphia, PA 19122
United States

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