Bank Branching Applications and Window Dressing: Evidence on Banks’ Strategic Use of Loan Loss Provisions

50 Pages Posted: 28 Jul 2021

See all articles by Di Gong

Di Gong

University of International Business and Economics (UIBE) - School of Banking and Finance

Harry Huizinga

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

Tianshi Li

Capital University of Economics and Business

Jigao Zhu

University of International Business and Economics

Date Written: July 8, 2021

Abstract

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

Suggested Citation

Gong, Di and Huizinga, Harry and Li, Tianshi and Zhu, Jigao, Bank Branching Applications and Window Dressing: Evidence on Banks’ Strategic Use of Loan Loss Provisions (July 8, 2021). Available at SSRN: https://ssrn.com/abstract=3882259 or http://dx.doi.org/10.2139/ssrn.3882259

Di Gong

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Harry Huizinga

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2623 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tianshi Li

Capital University of Economics and Business ( email )

Beijing
China

Jigao Zhu (Contact Author)

University of International Business and Economics ( email )

Room 412, Ningyuan Building
Huixindong street 10
Beijing, 100029
China

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