Asymmetric Loan Loss Provisioning
55 Pages Posted: 2 Apr 2019
Date Written: March 7, 2019
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: Suggested Citation