EBA欧洲银行-Domikosky2C20Foos2C20Pramor-Loan-Loss-Accounting-Rules-and-Bank-Lending-over-the-Cycle.-Evidence-from-a-Global-Sample-Presentation_14页_855kb

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

Core Content

This document presents an analysis of how loan loss provisioning (LLP) rules affect bank lending cyclicality across a global sample of banks. The study examines the relationship between accounting standards and the pro-cyclical behavior of banks during economic cycles, particularly focusing on the capital crunch hypothesis. It also evaluates the impact of backward- and forward-looking LLP rules on loan growth and bank lending behavior.

Main Viewpoints

• Accounting standards play a significant role in shaping bank lending behavior over the business cycle.
• There is considerable uncertainty in determining appropriate loan-loss reserves, especially during economic downturns.
• Pro-cyclical lending is a major concern, and forward-looking provisioning rules could help reduce this effect.
• Regulatory reforms are suggested to address the disincentives created by current LLP rules, particularly in Basel II.
• The trade-off between transparency and stability is highlighted as a key issue in post-crisis regulatory frameworks.

Key Information

Loan Loss Provisioning and Cyclicality

• Capital crunch hypothesis (Peek and Rosengren, 1995) suggests that banks may reduce lending during downturns due to capital constraints.
• LLP rules that rely heavily on backward-looking data (e.g., days in arrears) lead to greater sensitivity of loan growth to nominal GDP growth.
• Forward-looking LLP rules, which incorporate probability of default (PD), may reduce the pro-cyclical effect of lending.

Accounting Standards and Regulatory Reforms

• Existing standards require judgment to determine incurred losses, which can be subjective and lead to delays in loss recognition.
• Delayed loss recognition can result in debt overhang, capital inadequacy, and equity financing frictions, ultimately leading to balance sheet contractions.
• Proposals include revising accounting standards to promote more forward-looking loan loss provisioning practices.

Empirical Model and Results

• The baseline econometric model is defined as:
  $$
  \Delta \mathrm{Loans}{i,t} = \beta_0 + \beta_1 \cdot \mathrm{NDI}{i,t-1} + \beta_2 \cdot \mathrm{Equity}{i,t-1} + \beta_3 \cdot \mathrm{Loans}{i,t-1} + \beta_4 \cdot \mathrm{Deposits}{i,t-1} + \beta_5 \cdot \log (\mathrm{TA}){i,t-1} + \beta_6 \cdot \Delta \mathrm{NGDP}{c,t} + \beta_7 \cdot \operatorname{ProvIndex}(1/2/3)\mathrm{b}{c,t} + \beta_8 \cdot \Delta \mathrm{NGDP}{c,t} \cdot \operatorname{ProvIndex}(1/2/3)\mathrm{b}{c,t} + \epsilon_{i,t}
  $$
• Dependent variable: $\Delta \text{Loans}{i,t} = \frac{\text{Total Lending}{i,t}}{\text{Total Lending}_{i,t - 1}} - 1$
• Control variables include:
  • Non-Discretionary Income (NDI)
  • Equity-to-total-assets ratio
  • Loans-to-total-assets ratio
  • Deposits-to-total-liabilities ratio
  • Log of total assets (log(TA))

Results Overview

• Higher backward-looking LLP rules are associated with greater sensitivity of loan growth to changes in nominal GDP.
• Provisioning indices (ProvIndex1b, ProvIndex2b, ProvIndex3b) show that more backward-looking rules lead to stronger pro-cyclical effects.
• Interaction terms between nominal GDP growth and LLP rules indicate a non-linear relationship, with backward-looking rules amplifying the business cycle effect.

Robustness Checks

• The findings are robust across various estimation strategies:
  • Static and dynamic fixed effects
  • Weighted Least Squares (WLS) to account for heterogeneity
  • Expert-reviewed accounting index values
  • Alternative business-cycle variables (real GDP, unemployment rate, peak-trough indicators)
  • Differentiation by bank size (small vs. large banks)
• The study uses survey data to distinguish between demand-side and supply-side effects of lending behavior.

Policy Implications

• Regulatory reforms should consider the impact of LLP rules on bank stability and real-sector outcomes.
• A shift from incurred-loss to expected-loss provisioning could mitigate pro-cyclical lending.
• Further research is needed to explore the interactions between LLP rules and other regulatory factors, such as bank-specific risk and tax considerations.

Conclusion

The study demonstrates that backward-looking loan loss provisioning rules significantly influence bank lending cyclicality, with more pro-cyclical effects observed in countries with stricter backward-looking rules. These findings support the capital crunch hypothesis and suggest that revising accounting standards to incorporate forward-looking credit information could improve bank stability and lending behavior during economic cycles. The results are robust across different specifications and estimation techniques, highlighting the importance of LLP rules in shaping the financial system's resilience.