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An information quality-based explanation for loan loss allowance inadequacy during the 2008 financial crisis

Ling Yang

Journal of Accounting and Economics, 2022, vol. 73, issue 1

Abstract: I study whether commercial banks' loan loss allowances were inadequate during the 2008 financial crisis because bank managers relied on low-quality information to estimate loan losses. To measure the quality of information collected on bank-held mortgages prior to the crisis, I create a bank exposure-to-mortgage fraud risk index (EFI) that captures overstatement of borrower income in mortgage applications. I find banks that originated more loans in high-risk neighborhoods had less adequate loan loss allowances during the crisis. My study is consistent with the hypothesis that fraudulent borrower information adversely affected banks’ loan loss provisioning.

Keywords: Banks; Loan loss allowances; Information quality; Reporting transparency; Mortgage fraud; The 2008 financial crisis (search for similar items in EconPapers)
JEL-codes: G01 G21 M41 R30 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.jacceco.2021.101433

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Journal of Accounting and Economics is currently edited by J. L. Zimmerman, S. P. Kothari, T. Z. Lys and R. L. Watts

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