Forward Looking Loan Provisions: Credit Supply and Risk-Taking

Bernardo Morais, Gaizka Ormazabal, Jose-Luis Peydro, Mónica Roa and Miguel Sarmiento

Borradores de Economia from Banco de la Republica de Colombia

Abstract: We show corporate-level real, financial, and (bank) risk-taking effects associated with calculating loan provisions based on expected—rather than incurred—credit losses. For identification, we exploit unique features of a Colombian reform and supervisory, matched loan-level data. The regulatory change induces a dramatic increase in provisions. Banks tighten all new lending conditions, adversely affecting borrowing-firms, with stronger effects for risky-firms. Moreover, to minimize provisioning, more affected (less-capitalized) banks cut credit supply to risky-firms—SMEs with shorter credit history, less tangible assets or more defaulted loans—but engage in “search-for-yield” within regulatory constraints and increase portfolio concentration, thereby decreasing risk diversification. **** RESUMEN: Este documento analiza los efectos reales, financieros y de toma de riesgos bancarios asociados al cambio en el cálculo de las provisiones de los préstamos con base en pérdidas esperadas a las calculadas con base en pérdidas incurridas. En nuestra identificación explotamos características únicas de una reforma regulatoria en Colombia usando datos a nivel de préstamos banco-firma. Encontramos que el cambio regulatorio condujo a un importante incremento en las provisiones bancarias. Asimismo, los bancos endurecieron los estándares de crédito, afectando negativamente a las firmas deudoras con efectos más fuertes sobre las firmas riesgosas. Para reducir el nivel de provisiones, los bancos más afectados (menos capitalizados) redujeron la oferta de crédito a las firmas riesgosas (firmas pequeñas con menor historia crediticia, menores activos tangibles o mayores préstamos en mora) y a su vez, incrementaron la búsqueda de retorno dentro del sector menos afectado por la regulación, aumentaron así la concentración del portafolio de créditos y por ende reduciendo la diversificación del riesgo.

Keywords: Loan provisions; IFRS9; ECL; corporate credit; real effects; bank risk-taking; Provisiones de préstamos; crédito corporativo; efectos reales; toma de riesgos bancarios (search for similar items in EconPapers)
JEL-codes: E31 G18 G21 G28 (search for similar items in EconPapers)
Pages: 52
Date: 2021-05
New Economics Papers: this item is included in nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://doi.org/10.32468/be.1159

Related works:
Working Paper: Forward Looking Loan Provisions: Credit Supply and Risk-taking (2020)
Working Paper: Forward looking loan provisions: Credit supply and risk-taking (2020)
Working Paper: Forward Looking Loan Provisions: Credit Supply and Risk-Taking (2020)
Working Paper: Forward Looking Loan Provisions: Credit Supply and Risk-Taking (2020)
Working Paper: Forward Looking Loan Provisions: Credit Supply and Risk-Taking (2020)
Working Paper: Forward looking loan provisions: Credit supply and risk-taking (2020)
Working Paper: Forward looking loan provisions: Credit supply and risk-taking (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:1159

DOI: 10.32468/be.1159

Access Statistics for this paper

More papers in Borradores de Economia from Banco de la Republica de Colombia Cra 7 # 14-78. Contact information at EDIRC.
Bibliographic data for series maintained by Clorith Angélica Bahos Olivera ().