The Politics of Underreporting Loan Losses: Evidence from the Mandatory Shift to Expected Credit Loss Provisioning in China

50 Pages Posted: 16 May 2022 Last revised: 30 Jun 2022

See all articles by Mingyi Hung

Mingyi Hung

Hong Kong University of Science & Technology (HKUST)

Yi Ru

Renmin University of China - Business School

Guoman She

The University of Hong Kong - Faculty of Business and Economics

Lynn Linghuan Wang

The University of Hong Kong

Date Written: May 2, 2022

Abstract

We study how political considerations affect banks’ loan loss provisions using China’s mandatory shift to expected credit loss (ECL) provisioning. We find that the mandatory shift has no overall net effect on the magnitudes or timeliness of provisions for state-owned banks. While these properties of provisions increase among state-owned banks with relatively weak political influence, these increases diminish among other state-owned banks (i.e., banks that have local officials with strong career incentives; serve as a key instrument in providing credit subsidies; and hold strong connections with asset management companies). Further, nonstate banks increase the magnitudes and timeliness of provisions following the mandatory shift, suggesting that strong regulatory monitoring can lead to faithful implementation of ECL provisioning in emerging economies. Overall, our findings support the political view of state ownership that politicians underreport loan losses to extract private benefits, thereby reducing the effectiveness of ECL adoption.

Suggested Citation

Hung, Mingyi and Ru, Yi and She, Guoman and Wang, Lynn Linghuan, The Politics of Underreporting Loan Losses: Evidence from the Mandatory Shift to Expected Credit Loss Provisioning in China (May 2, 2022). Available at SSRN: https://ssrn.com/abstract=4098566 or http://dx.doi.org/10.2139/ssrn.4098566

Mingyi Hung

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Yi Ru

Renmin University of China - Business School ( email )

Room 929
Mingde Business Building
Beijing, Beijing 100872
China

Guoman She (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Lynn Linghuan Wang

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
Hong Kong

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