Loan Loss Provision, Unsecured-Collateralized Loan Choice and Macro-Stability in China

Lim King Yoong (), Liu Chunping () and Tan Linzhi ()
Additional contact information
Lim King Yoong: International Business School Suzhou, Xi’an Jiaotong-Liverpool University, Suzhou, China
Liu Chunping: Nottingham Business School, 6122 Nottingham Trent University , Nottingham, England
Tan Linzhi: Nottingham Business School, 6122 Nottingham Trent University , Nottingham, England

The B.E. Journal of Macroeconomics, 2025, vol. 25, issue 2, 847-884

Abstract: We develop a novel dynamic stochastic general equilibrium model with loan-loss provisions (LLPs) and unsecured-collateralized loan choice, the latter being endogenously determined due to enterprises having heterogeneous production capacity. Further, due to the presence of a second source of production uncertainty, which is only observed ex-post to loan contracting, type-specific aggregate default rates are endogenously determined too, which results in a model economy whose cyclicality can be driven significantly by LLP adjustment shocks. We estimate the model using actual Chinese data from 2004Q4 to 2020Q4. Our estimated model is able to generate co-movement between LLPs and the unsecured-collateralized loan ratio, a feature of the Chinese banking system that is consistent with empirical evidence. We also find that banks’ LLPs are countercyclical, despite the overall LLP regime still remaining relatively backwards-looking, indicating that the present Chinese banking regulations can be overly prudent.

Keywords: China; DSGE model; loan loss provision; macro-financial stability; unsecured loan choice (search for similar items in EconPapers)
JEL-codes: E32 E44 G21 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/bejm-2025-0101 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
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:bpj:bejmac:v:25:y:2025:i:2:p:847-884:n:1013

Ordering information: This journal article can be ordered from
https://www.degruyte ... ournal/key/bejm/html

DOI: 10.1515/bejm-2025-0101

Access Statistics for this article

The B.E. Journal of Macroeconomics is currently edited by Arpad Abraham and Tiago Cavalcanti

More articles in The B.E. Journal of Macroeconomics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().