Local governments' economic growth target pressure and bank loan loss provision: Evidence from China

Meixu Ren, Konglin Ke, Xin Yu and Jinxuan Zhao

International Review of Economics & Finance, 2023, vol. 87, issue C, 1-14

Abstract: This paper aims to investigate whether and how the top-down amplification of economic growth targets affects banks' loan loss provision (LLP). We find that banks in prefecture-level cities with higher economic growth target pressure (EGTP) will withdraw more LLPs, indicating that they will accrue reserves prospectively to deal with potential credit losses. We further find that EGTP reduces credit allocation efficiency and increases future loan losses, and banks' risk prevention motivation is the mechanism for accruing LLPs. It's also shown that fiscal pressure and promotion pressure will amplify EGTP's effect, while reduced government intervention will weaken banks' risk prevention motivation. Overall, our paper provides systematic evidence on how banks respond to the negative impact of EGTP through loan loss provisioning.

Keywords: Economic growth target pressure; Loan loss provision; Risk prevention motivation; Government intervention (search for similar items in EconPapers)
JEL-codes: G21 H77 M41 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:87:y:2023:i:c:p:1-14

DOI: 10.1016/j.iref.2023.04.018

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