Loan Loss Provisions and Lending Behavior of Banks: Do Information Sharing and Borrower Legal Rights Matter?

Wahyoe Soedarmono, Amine Tarazi, Agusman Agusman, Gary S. Monroe and Dominic Gasbarro
Additional contact information
Agusman Agusman: bank indonesia - bank indonesia
Gary S. Monroe: UNSW - University of New South Wales [Sydney]
Dominic Gasbarro: Murdoch University [Perth]

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Abstract: In this paper, we examine the role of information sharing and borrower legal rights in affecting the procyclical effect of bank loan loss provisions. Based on a sample of Asian banks, our empirical results highlight that higher non-discretionary provisions reduce loan growth and hence, non-discretionary provisions are procyclical. A closer investigation suggests that better information sharing through public credit registries managed by central banks, but not private credit bureaus managed by the private sector, might substitute the role of a dynamic provisioning system in mitigating the procyclicality of non-discretionary provisions. We also document that higher discretionary provisions in countries with stronger legal rights of borrowers may temper the procyclical effect of non-discretionary provisions. However, these findings only hold for small banks. This suggests that the implementation of a dynamic provisioning system to mitigate the procyclicality of non-discretionary provisions is more crucial for large banks, because such procyclicality cannot be offset by strengthening credit market environments through better information sharing and legal rights of borrowers.

Keywords: Loan loss provisions; loan growth; information sharing; borrower legal rights (search for similar items in EconPapers)
Date: 2016-03-08
New Economics Papers: this item is included in nep-ban and nep-sea
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Working Paper: Loan Loss Provisions and Lending Behavior of Banks: Do Information Sharing and Borrower Legal Rights Matter? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-01284978

DOI: 10.2139/ssrn.2131582

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