Bank Branching Applications and Window Dressing: Evidence on Banks’ Strategic Use of Loan Loss Provisions
50 Pages Posted: 28 Jul 2021
Date Written: July 8, 2021
After the removal of geographic restrictions on branching in 2006, China’s city commercial banks (CCBs) can apply for permission to branch outside their province. This paper shows that CCBs report higher loan loss provisions before filing an application, thereby increasing the provision coverage ratio of nonperforming loans and making the bank look safer to regulators.Our finding is robust to controlling for possible endogeneity of the branching application decision by employing propensity score matching estimators, and it is confirmed when we consider a quasi-natural experiment of deregulation reversal.
Keywords: Window dressing, loan loss provisions, provision coverage ratio, deregulation, branching
JEL Classification: G21, G28, M41
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