Policy uncertainty and loan loss provisions in the banking industry

Jeffrey Ng (), Walid Saffar () and Janus Jian Zhang ()
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Jeffrey Ng: The Hong Kong Polytechnic University
Walid Saffar: The Hong Kong Polytechnic University
Janus Jian Zhang: The Hong Kong Polytechnic University

Review of Accounting Studies, 2020, vol. 25, issue 2, No 9, 726-777

Abstract: Abstract Policy uncertainty is an increasingly important issue in many economies. Extensive evidence indicates that higher policy uncertainty is associated with future negative macroeconomic and microeconomic conditions. In this paper, we examine how policy uncertainty affects banks’ accruals for loan losses. Consistent with banks signaling more expected loan losses, we document that in times of higher policy uncertainty, banks make more loan loss provisions. This positive association is more pronounced for banks that were previously less prudent in their risk-taking and loan loss reserving, indicating that less prudent banks are harmed more by loan losses in difficult times. We also show that higher attention paid to a banks’ financial reporting strengthens the role of loan loss provisions as a signal of expected loan losses. Overall, our paper offers insight into how, in the face of policy uncertainty, banks convey information about their loan portfolios to their stakeholders.

Keywords: Policy uncertainty; Accruals estimates; Banking; Loan loss provisions; Earnings management (search for similar items in EconPapers)
JEL-codes: G21 G32 M41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (40)

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DOI: 10.1007/s11142-019-09530-y

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