XXV Edition

1-2 December 2016"

Loan Loss Accounting Rules and Bank Lending over the Cycle: Evidence from a Global Sample

Pramor Marcus, Deutsche Bundesbank
Domikowsky Christian, University of Muenster
Foos Daniel, Deutsche Bundesbank

This study empirically analyzes how the cross-country differences in loan loss accounting rules affect banks’ lending behavior over the business cycle. Our findings deliver new insights for the ongoing debate on the procyclicality of loan loss provisions and the potential impact on bank lending. Based on a novel dataset comprising detailed information on local GAAP provisioning rules in a large number of countries across the globe, we develop several indices that reflect banks’ ability to take a forward-looking approach in the assessment of their credit risk reserves. These indices are used to explain the individual lending behavior of up to 4,575 banks in 52 countries. Consistent with the capital crunch hypothesis, we find that bank lending is more procyclical if banks are subject to more backward-looking loan loss accounting rules.

Area: Banking

Keywords: Bank lending, loan loss provisioning, nonperforming loans, procyclicality

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