TY - JOUR
T1 - Bank loan loss provisions research
T2 - A review
AU - Ozili, Peterson K.
AU - Outa, Erick
PY - 2017/9/1
Y1 - 2017/9/1
N2 - 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.
AB - 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.
KW - Accounting discretion
KW - Banks
KW - Capital management
KW - Dynamic provisioning
KW - Income smoothing
KW - Islamic banking
KW - Loan loss provisions
KW - Procyclicality
KW - Prudential regulation
KW - Signalling
UR - http://www.scopus.com/inward/record.url?scp=85020631710&partnerID=8YFLogxK
U2 - 10.1016/j.bir.2017.05.001
DO - 10.1016/j.bir.2017.05.001
M3 - Review article
AN - SCOPUS:85020631710
VL - 17
SP - 144
EP - 163
JO - Borsa Istanbul Review
JF - Borsa Istanbul Review
SN - 2214-8450
IS - 3
ER -