Asymmetric Loan Loss Provision Models
97 Pages Posted: 15 Oct 2020
Date Written: August 25, 2020
Large net loan charge-offs are frequently associated with large decreases in nonperforming loans and large increases in loan loss provisions, inducing a V-shaped relation between loan loss provisions and nonperforming loan changes. Failure to model the asymmetry attributable to net loan charge-offs can change inferences about the presence of earnings management and the effects of delayed loan loss recognition in prior papers that assumed linearity. Future researchers should either include net loan charge-offs in linear models of loan loss provisions or explicitly model the asymmetry induced by omitting net loan charge-offs.
Keywords: loan collectability, loan charge-offs, misspecification, delayed loan loss recognition, conditional conservatism
JEL Classification: G21, G28, M41, M48
Suggested Citation: Suggested Citation