Banks’ loan charge-offs and macro-level risk

Justin Y. Jin, Mary L.Z. Ma, Victor Song and Mengyang Guo

Journal of Behavioral and Experimental Finance, 2021, vol. 32, issue C

Abstract: Prior studies document that delayed loan loss provisions can worsen financial stability by triggering a capital inadequacy concern. We extend prior literature and investigate how the treatment of loan charge-offs (LCOs) in financial statements is tied to macro-level risk in the U.S. banking industry. We hypothesize and find that nondiscretionary LCOs are positively linked to banks’ future systemic risk, whereas discretionary LCOs are negatively correlated with banks’ future systemic risk. We further show that these effects are driven by two economic mechanisms: banks’ common risk exposure and interconnectedness. This study is the first to document the linkage between banks’ discretionary LCOs and macro-level risk in the banking industry.

Keywords: Banks; Financial statements; Loan charge-offs; Systemic risk; Macroeconomy (search for similar items in EconPapers)
JEL-codes: E32 G G21 M41 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:32:y:2021:i:c:s2214635021001179

DOI: 10.1016/j.jbef.2021.100573

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