Non-performing loans and bank value: The role of loan loss provisioning in US banks

Wan-Fei Lai () and Kim-Leng Goh ()
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Wan-Fei Lai: UCSI University
Kim-Leng Goh: Universiti Malaya

Economics Bulletin, 2025, vol. 45, issue 3, 1209 - 1227

Abstract: High non-performing loans consistently pose significant risks to bank value. By using a panel data regression model with data on publicly listed US banks, this study reveals that non-performing loans significantly reduce bank value. We found that the negative impact of non-performing loans can be cushioned by increasing loan loss provisions. The findings remain robust with endogeneity tests and fixed effects models. However, its cushioning impact begins to dissipate when loan loss provisions exceed the estimated 7.55% threshold. The cushioning effect is larger for the low prudence banks, and they can also sustain a higher optimal level of provisioning than high prudence banks. Further analysis shows under-provisioning in low prudence banks. These findings highlight the importance of provisioning to mitigate damages of non-performing loans on bank value, and even more so for the low prudence banks.

Keywords: Valuation; Loan loss provisions; Capital adequacy ratio; Panel data; Accountable institutions (search for similar items in EconPapers)
JEL-codes: G1 M2 (search for similar items in EconPapers)
Date: 2025-09-30
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