Alternative Evidence and Views on Asymmetric Loan Loss Provisioning
33 Pages Posted: 26 Oct 2020
Date Written: September 4, 2020
Based on a linear provision/charge-off association and V-shaped scatter-plots of these variables against nonperforming loan changes, Basu et al. (2020) argue that nonperforming loan changes mis-measure credit quality and linear provision models are mis-specified. They conclude that residual asymmetry controlling for charge-offs results from loan heterogeneity and the real estate crisis. Using additions to non-accruals to measure credit quality, we find a linear association with provisions, that controlling for charge-offs induces mis-specification, and no evidence of provision asymmetry. These results highlight the importance of basing hypotheses and causal models on theoretical underpinnings rather than on plots subject to known fallacies.
Keywords: Loan Loss Provisions, Methodology
JEL Classification: M41, G20
Suggested Citation: Suggested Citation