Loan Loss Research Articles

Monetary and Macroprudential Policy and Welfare in an Estimated Four‐Agent New Keynesian Model

Monetary and Macroprudential Policy and Welfare in an Estimated Four‐Agent New Keynesian Model

Credit Constraints and Bank Failures: A Macroprudential Perspective on the U.S. Commercial Banking Sector

We examine the impact of economy wide credit tightening on bank failures and investigate the relationship between bank failures and tighter monetary policy while accounting for bank balance sheet variables. Using a sample of U.S. banks from 1984 to 2020, we find the following: i) increases in corporate credit spreads lead to a significant increase in aggregate bank failures; ii) lower aggregate bank return on equity and higher allowances for loan losses are associated with a higher incidence of bank failures; iii) no robust evidence suggesting that tighter monetary policy drives higher bank failures. Finally, we show that lower bank failures, contraction in corporate credit spreads, higher bank profitability, and higher stock market returns contribute to higher economic growth, highlighting the interconnectedness of banking, stock markets, credit availability, and the macro-economy. These results may have potential macro-prudential policy implications.

The implementation of IFRS9 in Gulf banks: using the GMM and the difference-in-differences with multiple time periods approaches

Purpose This paper aims to examine the impact of the mandatory adoption of (International Financial Reporting Standards [IFRS] 9) on loan provisions, nonperforming loans (NPL) and impairment loan loss in Gulf banks. This study also investigates potential variations in outcomes compared to prior models and explores the use of the Callaway and Sant’Anna (2021) estimator for difference-in-differences (DiD) with multiple time periods. Design/methodology/approach The research is based on a sample of 53 Gulf banks covering the period from 2012 to 2020. The study analyzes the changes in loan provisions, impairment loss and NPL following the implementation of IFRS 9. It uses statistical analysis and the DiD method to compare the outcomes between the experimental group (treated by IFRS 9) and the control group (not treated). Findings The findings reveal a statistically insignificant increase in loan provisions, impairment loss and NPL after the adoption of IFRS 9. These results align with previous studies and suggest that Gulf banks were proactive in anticipating and mitigating the impact of the new standard. The study also observes a synchronization of provisioning practices across Gulf countries and a certain level of consistency in recognizing loan losses. Practical implications The practical implications of this study suggest that Gulf banks have successfully absorbed the impact of IFRS 9 and have implemented collaborative approaches. Originality/value The study offers some new sight into IFRS9 outcomes in developing countries and opens the door for implementing a novel DiD estimation in future research studies.

Impairment of monetary policy independence by global financial cycles and the mitigating role of macroprudential policies

ABSTRACT In this paper, we study the impairment in monetary policy caused by different forms of global financial cycles. We find that while both equity inflows and outflows cycles do exert influence over monetary policy, the bond inflows cycle does not have a significant impact. Further, we discuss the role of macroprudential policies in mitigating this impairment by using Difference-in-Difference with heterogeneous treatment effects which is robust to presence of heterogeneity across both time periods and groups. We find that FX-based policies such as Capital Restrictions on Foreign Exchange positions and Limits on Foreign Exposure alongside SIFIs and Loan Loss Provisioning are effective in reducing the impairment.

The impact of income diversification on the stability of listed Jordanian commercial banks during the COVID-19 pandemic

This study investigates the impact of the COVID-19 pandemic on the relationship between income diversification and bank stability among Jordanian commercial banks listed on the Amman Stock Exchange (ASE), using a panel Autoregressive Distributed-Lagged Model (panel-ARDL) and quarterly data from 2015 to 2021. The findings demonstrate that during the COVID-19 period, a higher proportion of non-interest income, resulting from income diversification, enhances bank stability. However, considering the entire sample period, the results suggest a potential deterioration in bank stability when banks diversify towards non-interest income, aligning with the negative effect observed in the literature. Additionally, the study identifies factors such as bank size, liquidity, loan loss provisions, cost efficiency, and the deposit ratio, which influence bank stability. These findings hold significant implications for policymakers and banks in developing countries concerned about the impact of income diversification on bank stability. They also offer valuable insights to understanding the dynamics of income diversification and its implications for bank stability in the context of the COVID-19 pandemic.

Credit risk management and profitability: Evidence from Palestinian banks

Credit risk has gained considerable attention in most countries of the world intending to manage the efficiency of credit portfolios. This study attempts to examine the impact of credit risk management on bank profitability. The local Bank of Palestine provided secondary data over a ten-year period (2010–2020) collected from financial annual reports. The statistical analysis is carried out using the SPSS and E-views software, and the study hypotheses are verified using descriptive statistics, multicollinearity tests, and regression. Palestinian banks’ profitability was evaluated using return on assets, along with bank-specific metrics such as capital adequacy ratio (CAR), loan-to-deposit ratio (LDR), non-performing loans (NPLs), loan loss provision ratio (LLPR), bank size, and bank age, as signs of credit risk management. The study’s findings indicate that there are differences in how credit risk management affects bank profitability in the context of Palestine. CAR NPLs have a positive but insignificant effect on profitability using ROA. The regression found a significant positive effect of LLPR on profitability using ROA. Finally, with respect to LDR as an indicator of credit risk management, the regression found its negative but insignificant effect on profitability using ROA. The results demonstrate how the board’s structure influences the performance of a company, which is regarded important knowledge for decision makers.

IFRS 9 implementation and bank risk

ABSTRACT In this paper, we investigate the impact of IFRS 9 – Financial instruments on bank risk. Using a sample of 666 banks across 61 countries for the period 2016–2019, we find a decrease in bank risk following the implementation of IFRS 9. This implies that the forward-looking loan loss provisioning, mandated under IFRS 9, facilitates a reduction in bank risk. We find this effect to be more pronounced for riskier banks, suggesting that the implementation of IFRS 9 is a sign of effective regulation for banks rather than a manifestation of regulatory overreach. We also find the effect to be greater for banks in countries with stronger accounting regulatory enforcement and high banking supervision intensity. Overall, our results, which are robust to different estimation techniques, including multi-level hierarchical regressions and entropy balancing estimations, show that increased transparency and timely recognition under IFRS 9 reduce bank risk.

Research on the Efficiency of China's Listed Commercial Banks from the Perspective of Risk Management

<p>Based on the panel data of 36 listed commercial banks in my country from 2014 to 2018, this paper takes Loan Loss Reserves (LLR) and Non-performing Loans (NPL) as undesired output, analyzes the impact of risk management factors on the efficieney of China's listed commercial banks, and provides a comprehensive A comparative study on the efficiency of four types of banks: joint-stock commercial banks, city commercial banks and rural commercial banks, and the Bootstrap method is used to analyze the factors affecting bank efficiency.</p>

The impact of tighter banking regulation on bank loan loss provisioning: empirical evidence from a quasi-natural experiment

PurposeThe paper aims to examine the impact of tighter banking regulation on banks’ loan loss provisioning in an emerging market context.Design/methodology/approachThe authors exploit the adoption of the Basel II Accord in Vietnam as a quasi-natural experiment and use Difference-to-Difference (DiD) method to examine the impact of tighter banking regulation on Vietnamese banks’ provisioning during the period of 2010–2019.FindingsThe paper finds that affected banks (i.e. those taking part in the pilot adoption programme) manage to reduce their provisions significantly compared to their control peers in the post-adoption period. More importantly, this paper further finds that the affected banks manage their provisions primarily for incomes smoothing and signalling. This paper also finds that those banks expand their lending significantly and experience an increase in financial performance in the post-adoption period. Overall, the results provide supports for the “borrowing from the future” proposition that banks may perceive that a tighter banking regulation provides them with growth opportunities, so they have the tendency to manipulate their provisions to facilitate their current income.Originality/valueThis paper contributes to the established literature on the manipulation of bank provisioning as well as the impact of banking regulation, and especially Basel II on bank economic decisions. As compared to prior literature, the adoption of Basel II in Vietnam provided an ideal shock for us to conduct a DiD design to estimate the causal impact of tighter banking regulation on banks’ provisioning practices.

EARNINGS AND CAPITAL MANAGEMENT THROUGH LOAN LOSS PROVISIONS IN INDONESIAN BANKS AFTER IFRS 9 IMPLEMENTATION

This study aims to examine whether Indonesian banks perform earnings and capital management through loan loss provisions and whether IFRS 9 implementation improves accounting quality by focussing on those practices. The analysis is conducted with a sample of 28 banks in Indonesia selected from the Indonesian Stock Exchange from 2012 – 2021. This study adopts a model modified from previous studies (Ahmed et al. 1999; Anandarajan et al. 2003; Anandarajan et al. 2006; Leventis et al. 2011). Using the model, this study finds that Indonesian banks perform earnings management but do not perform capital management through loan loss provisions. Although IFRS 9 implementation increases loan loss provisions, it does not affect earnings and capital management practices.

Evidence from the adoption of IFRS 9 and the impact of COVID-19 on lending and regulatory capital on Spanish Banks

This paper provides early descriptive evidence on the effect of the adoption of IFRS 9 and COVID-19 on banks’ lending and regulatory capital. Using a sample of Spanish quoted banks, we find that the implementation of IFRS 9 resulted in an increase in the timeliness of loan loss recognition, and it only had a negative effect on lending for small banks that are timelier in recognizing expected credit losses. Timelier banks, large and small, increased their Tier 1 regulatory capital after the implementation of IFRS 9, although larger banks to a greater extent. Despite the extraordinary economic stimulus measures taken during the COVID-19 shock, there is a reduction in lending for small banks that are timelier in recognizing expected credit losses, and an increase in Tier 1 capital for timelier large banks. These results are not inconsistent with IFRS 9 having some procyclical traits, as it is not possible to anticipate truly unexpected shocks like COVID-19. The fact that IFRS 9 is more forward looking than its predecessor IAS 39, and that the observed effects are mild suggests that IFRS 9 is likely less procyclical than IAS 39.

Fiscal support and banks’ loan loss provisions during the COVID-19 crisis

We study the effect of governments’ fiscal support on banks’ loan loss provisioning during the COVID-19 pandemic. In addition, we decompose fiscal support into direct support and liquidity support to examine the effect of different types of support measures on banks’ loan loss provisioning. Direct support generally refers to cash transfers, tax reliefs, and tax deferrals, while liquidity support generally refers to government-backed loans and equity injections. We find that direct support reduced banks’ loan portfolio risk whereas liquidity support did not. Moreover, we find the effect goes beyond a macroeconomic stabilization effect, suggesting that direct support directly contributed to mitigating banks’ loan portfolio risk during the pandemic. Our results are robust to controlling for other policy interventions, alternative model specifications, and an instrumental variable approach. We further discuss the policy implications of our analysis.

Impact of credit risk management on the financial stability of Vietnamese commercial banks

The research was conducted to understand the impact of credit risk management on the financial stability of 27 Vietnamese commercial banks. From the research results, the authors proposed some implications for credit risk management and solutions to promote financial stability for banks. The study used secondary data obtained from audited financial statements of banks in the period 2006 - 2020. Because the research model had intermediate variables, we used SEM to analyze and the data was processed by Stata. Research results show that non-performing loans and loan loss provisions had a direct effect on profitability and financial stability. Besides, there was an indirect relationship between credit risk management, profitability, and financial stability. The research proved whether the characteristics of Vietnam's banking system and the obtained results are compatible with the theory and previous studies.

Credit Risk Management and the Financial Performance of Deposit Money Banks: Some New Evidence

This study examined credit risk management and return on equity of Nigerian deposit money banks (DMBs) twelve (12) years (2010–2021) post-adoption of the common accounting year-end as mandated by the Central Bank of Nigeria (CBN) in 2009. Our data set comprises independent variables of capital adequacy ratio (CAR), liquidity ratio (LQR), loan-to-deposit ratio (LDR), risk asset ratio (RAR), non-performing loans ratio (NPLR), loan loss provision ratio (LLP), and size (SZ). Our dependent variable is the return on equity (ROE). Using a panel data regression analysis, we found that CAR, RAR, NPLR, and SZ are the significant determinants of ROE. We also found that Nigerian DMBs now significantly rely on offshore borrowings in Eurobonds to create risk assets to overcome CBN’s constriction on using local depositors’ funds to create risk assets. Furthermore, we found that shareholders of DMBs with international banking licenses in Nigeria within the study period were not significantly more compensated for their risk exposure than investors in risk-free assets (treasury bills). Therefore, the CBN should continue strengthening its regulatory functions with regular reviews that would compel improvements of the DMBs’ credit risk management systems to mitigate the likely failure of the credit life cycle of granted loans. Additionally, a review of its current regulatory cash reserve ratio of 37.5% is imperative to reduce DMBs’ dependence on offshore funding and its associated foreign exchange risk.

RISK MANAGEMENT AND PERFORMANCE OF THE NIGERIAN BANKING INDUSTRY

The study examines the relationship between risk management and the performance of the Nigerian banking industry. The panel data analysis technique based on the fixed effects estimation was employed to analyze the Nigerian banking industry performance. Risk management related factors such as credit risk, liquidity risk, market risk, interest rate risk and operational risk. A total of 18 most active deposit money banks listed on the Nigerian Stock Market for a period of 22 years (2000 to 2021) were used in the analysis. The empirical findings revealed that credit risk and operational risk variables were negative and do not have any significant relationship with the performance of the Nigerian banking industry while liquidity risk and market risk have significant positive effect on bank performance, interest rate risk has significant negative relationship with banks performance in Nigeria within the period of study. The study recommends among others that, banks’ management should have proper understanding of how credit policy affects the operations of their banks to ensure judicious utilization of deposits and maximize profit. Improper credit risk management reduces bank profitability, affects the quality of its assets and increases loan losses and non-performing loan which may eventually lead to financial distress.

Board Composition and Non-Performing Loans among Commercial Banks in Tanzania

Objective – This paper investigates the effect of board composition on non-performing loans (NPLs) for a sample of 31 commercial banks in Tanzania.Design/methodology – A quantitative study methodology was employed using annual data covering the period of 2011-2020. The authors used a one-step generalised method of moments (GMM) approach to estimate the effect of board composition on the percentage growth of NPLs in Tanzania.Results – The paper concludes that the number of board members with financial expertise, the board size, the audit committee, and the presence of female directors significantly negatively impact the bank’s NPLs and hence aid in lowering the bank’s NPLs. In contrast, an increase in board size, lagged NPLs, credit committees, independent directors, board meetings, and advances in deposit ratio significantly increases the level of NPLs, which is consistent with the agency theory.Research Limitations/Implications – Inconsistencies in the reported variables from various databases during the study and afterwards, as well as a lack of data for some banks in specific years. Shareholders should actively establish good corporate governance in the commercial banks (CBs) they own to reduce NPLs at an acceptable rate of less than 5%. Also, the Central Banks of Tanzania should encourage CBs to implement effective corporate governance practices by enacting rules and regulations to reduce NPLs. To minimize loan losses, authorities should impose micro-prudential supervision on commercial banks’ lending behavior. Novelty/Originality – The paper includes bank size and ownership using a one-step difference and one-step system (GMM) approach to measure the effect, which is usually not the case with most studies.

EU Banks’ Accounting Policy Decisions and Market Influence

This study investigates the impact that market discipline mechanisms have on European Union (EU) banks’ accounting policy decisions. We investigate the association between the level of loan loss provisions (LLPs) with earnings before provisions and taxes when depositors appear to withdraw their funds and demand higher deposit rates. We examine whether market discipline motivates banks to adjust earnings through accounting accruals. Empirical findings suggest that the demand for higher deposit rates limits management’s accounting discretion. By contrast, withdrawals appear to encourage managers to use income smoothing via LLPs. The observed associations appear to be conditioned by banks’ systemic importance and capital adequacy levels.

IFRS 9, banking risk and COVID-19: Evidence from Europe

We explore whether the shift to the Expected Credit Loss model (ECL) helps Loan Loss Provisions (LLPs) anticipate future overall banking risk as compared to the Incurred Credit Loss model (ICL). Using a sample of European banks from 2015–2021, we find that ECL is more effective than ICL. We are pioneer to find evidence that stage 2 Loan Loss Allowance (LLA) is a good driver of future overall banking risk and that provisions moratoria due to the COVID-19 pandemic diminished the identified significant effect of LLPs and stage 2 LLA on banking risk, as expected.

Keeping up with the Joneses? Evidence from Peer Performance in the Banking Industry

AbstractThis paper traces the reaction of US banks to ROE underperformance on liquidity creation, equity capital, and loan loss provisions. We find that banks change their structures in the subsequent quarter after underperformance by increasing their on‐balance and off‐balance sheet liquidity creation to increase profitability. Banks tend to increase their equity capital and improve their loan quality by lowering non‐discretionary loan loss provisions to become safer. Banks signal their ability to overcome underperformance by increasing their discretionary loan loss provisions. Our results reveal that large banks rely mainly on off‐balance sheet liquidity creation as their primary tool to recover from underperformance while medium‐size and small banks adjust their equity capital to increase their safety.

PENGARUH CADANGAN KERUGIAN PENURUNAN NILAI (CKPN), JUMLAH KREDIT YANG DIBERIKAN, DAN KONDISI PERMODALAN TERHADAP PROFITABILITAS

This research aims it know allowance for impairment losses as measured by loan loss provisioning, credit which given as measured by credit propotion, condition of capital as measured by the capital adequacy ratio, eficiency aperational as measured by operating Expenses to Operating Revenue and Liquidity as measured by loan to deposit ratio to profibility as measured by return on assets incompanies banking listed on OJK the for years 2018-2022. The sampling technique used in this research in purposive sampling method and obtain 28 banks. Types of data used was secondary data obtained from www.ojk.go.id analyzing data used a statistical data processing sofware EVIEWS 12.00 for windows. Based on the result of mutiple regression analyzing with a aignifiance level of 5%, the result of the study conclude: (1). Allowance for impairment losses has no effect on profitability on companies of banking listed on OJK with the ? coefficient is negative amounted to -0.033 and significant value 0.127 > 0.05, (2). Credit which given has a significant on profitability on companies of banking listed on OJK with the ? coefficient positive is -0.113 and significance value 0.127 < 0.05. (3). Condition of capital has on effect on profitability on companies of banking listed on OJK with the ? coefficient -0.113 and significance value 0.033 > 0.05.