Loan Loss Accounting Rules across the Globe: What do we Know?

Abstract

A number of empirical studies in recent years have used cross-country data to analyze topics related to the procyclicality of loan loss provisions. However, surprisingly little is known about countries' underlying local GAAP provisioning rules. In this study, we extend the knowledge on loan loss accounting across the globe in three different ways: First, we shed light on the distribution of different characteristics of more than 150 local GAAP loan loss accounting regimes across the globe using data from the World Bank's Bank Regulation and Supervision Survey. Second, we use these data to develop indices that reflect if a provisioning regime follows an incurred loss model or allows banks to take account of expected losses. Third, we group countries, e.g. by development status or continental region, and examine patterns in provisioning rules across these groups. Fourth, we conduct our own survey among eleven central banks which is intended to provide a more comprehensive understanding of provisioning regimes. Generally, we find considerable heterogeneity in the structure of provisioning rules across countries as well as groups of countries. Whilst most countries require banks to classify a loan as nonperforming if payments are in arrears, almost 35% of the countries in our sample allow the recognition of nonperforming loans based on a forward-looking estimate of the PD. This finding is by far more pronounced in highly developed countries. Our findings can have important implications for the analysis of loan loss provisions in cross-country settings.