Does uncertainty matter for loan charge-offs?

Laetitia Lepetit, Frank Strobel and David G. Dickinson

Journal of International Financial Markets, Institutions and Money, 2012, vol. 22, issue 2, 264-277

Abstract: Using a stylized real options model, we show that discretion over the timing of charging off a non-performing loan could be economically justified when collateral values are uncertain and there is a chance of loan recovery. The implied hypothesis of an “uncertainty dependence” aspect in loan charge-offs is empirically tested and validated using a panel of European banks. A welfare-maximizing regulator might want to let banks pursue such discretionary loan charge-off behavior, with the problem of distinguishing it from alternative capital management and income smoothing objectives, while transparency-seeking accounting standards setters would presumably not.

Keywords: Discretion; Loan charge-off; Uncertainty dependence; Real option (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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Working Paper: Does uncertainty matter for loan charge-offs? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:22:y:2012:i:2:p:264-277

DOI: 10.1016/j.intfin.2011.09.006

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