The Effect of Credit Competition on Banks’ Loan-Loss Provisions

Yiwei Dou, Stephen G. Ryan and Youli Zou

Journal of Financial and Quantitative Analysis, 2018, vol. 53, issue 3, 1195-1226

Abstract: Exploiting differential interstate-branching deregulation across contiguous counties of adjacent states, we investigate the effect of entry threat on incumbent banks’ loan-loss provisions. Incumbents exposed to entry threat have offsetting incentives; lower provisions make their loan-underwriting quality appear better, deterring entry, but make local economic conditions appear better, encouraging entry. We find that the incentive to increase apparent loan-underwriting quality dominates on average. We further find that this incentive is stronger in counties with a higher proportion of heterogeneous loans, while the other incentive dominates in counties with both low heterogeneous loans and highly volatile economic conditions.

Date: 2018
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