Forward Looking Loan Provisions: Credit Supply and Risk-Taking

55 Pages Posted: 22 Sep 2020

See all articles by Bernardo Morais

Bernardo Morais

Board of Governors of the Federal Reserve System

Gaizka Ormazabal

University of Navarra, IESE Business School; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Monica Roa

Independent

Miguel Sarmiento

Tilburg University, CentER, European Banking Center (EBC); Central Bank of Colombia

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2020

Abstract

We show corporate-level real, financial, and (bank) risk-taking effects associated with calculating loan provisions based on expected—rather than incurred—credit losses. For identification, we exploit unique features of a Colombian reform and supervisory, matched loan-level data. The regulatory change induces a dramatic increase in provisions. Banks tighten all new lending conditions, adversely affecting borrowing-firms, with stronger effects for risky-firms. Moreover, to minimize provisioning, more affected (less-capitalized) banks cut credit supply to risky-firms— SMEs with shorter credit history, less tangible assets or more defaulted loans—but engage in “search-for-yield” within regulatory constraints and increase portfolio concentration, thereby decreasing risk diversification.

Keywords: bank risk-taking, corporate real and credit supply effects of accounting, ECL, IFRS9, loan provisions

JEL Classification: E31, G18, G21, G28

Suggested Citation

Morais, Bernardo and Ormazabal, Gaizka and Peydro, Jose-Luis and Roa, Monica and Sarmiento, Miguel, Forward Looking Loan Provisions: Credit Supply and Risk-Taking (September 1, 2020). Available at SSRN: https://ssrn.com/abstract=3696359

Bernardo Morais (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Gaizka Ormazabal

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jose-Luis Peydro

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

Monica Roa

Independent ( email )

Miguel Sarmiento

Tilburg University, CentER, European Banking Center (EBC) ( email )

Tilburg
Netherlands

HOME PAGE: http://https://scholar.google.com/citations?user=n2FzTYAAAAAJ&hl=es&oi=ao

Central Bank of Colombia ( email )

Carrera 7 #14-78
3551 de Bogotá
Colombia

HOME PAGE: http://www.banrep.gov.co/

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