Are Incurred Loss Standards Countercyclical? A Case Study Using U.S. Bank Holding Company Data
Fang Du (),
Diana Hancock () and
Alexander H. von Hafften ()
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Fang Du: Federal Reserve Board of Governors, 20th and C Street, NW, Washington, DC 20551, USA
Diana Hancock: Federal Reserve Board of Governors, 20th and C Street, NW, Washington, DC 20551, USA
Alexander H. von Hafften: Federal Reserve Board of Governors, 20th and C Street, NW, Washington, DC 20551, USA
JRFM, 2022, vol. 15, issue 3, 1-30
After the 2008 global financial crisis, U.S. bank holding companies needing to cover larger-than-expected loan losses raised concerns that existing provision accounting may be procyclical. Most related studies have found evidence of procyclicality using either aggregate time-series data or “as-reported” panel data. We test the null hypothesis that provisions were a constant fraction of nonperforming loans across the economic cycle. We create a “forced” panel, which incorporates the entities acquired by each holding company in the quarters prior to their mergers. As in the related literature, we fail to reject the null hypothesis with “as-reported” data; however, we reject the null hypothesis with the “forced” panel. This finding suggests that holding companies built up provisions to some degree during the pre-crisis period to cover larger future losses. These actions reduced capital and likely depressed lending in the pre-crisis period; such countercyclical impacts are consistent with post-crisis macroprudential policies.
Keywords: banks; accounting; provisions; loan losses; procyclical (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jjrfmx:v:15:y:2022:i:3:p:111-:d:760871
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