Bank loan loss provisions research: A review

Peterson K. Ozili, Erick Outa

Research output: Contribution to journalReview article

2 Downloads (Pure)

Abstract

We review the recent academic and policy literature on bank loan loss provisioning. Among other things, we observe that there exist some interaction between LLPs and existing prudential, accounting, institutional, cultural, religious, tax and fiscal frameworks which differ across countries; and we find that managerial discretion in provisioning is strongly linked to income smoothing, capital management, signalling, tax management and other objectives. We also address several issues including the ethical dimensions of income smoothing, factors influencing income smoothing, methodological issues in LLP modelling and the dynamic loan loss provisioning experiment; which opens up several avenues for further research such as: finding a balance between sufficient LLPs which regulators want versus transparent LLPs which standard setters want; the sensitivity of abnormal LLPs to changes in equity; the persistence of abnormal LLPs following CEO exit; country-specific interventions that induce LLP procyclicality in emerging countries; the impact of Basel III on banks' provisioning discretion; LLP behaviour among systemic and non-systemic financial institutions; etc. We conclude that regulators need to pay attention to how much discretion lending institutions should have in determining reported provision estimates, and this has been a long standing issue.

Original languageEnglish
Pages (from-to)144-163
Number of pages20
JournalBorsa Istanbul Review
Volume17
Issue number3
DOIs
Publication statusPublished - 1 Sep 2017
Externally publishedYes

Fingerprint Dive into the research topics of 'Bank loan loss provisions research: A review'. Together they form a unique fingerprint.

  • Cite this