Expansionary Monetary Policy and Bank Loan Loss Provisioning

Mengyang Guo, Xiaoran Jia, Justin Yiqiang Jin, Kiridaran Kanagaretnam () and Gerald J. Lobo
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Mengyang Guo: DeGroote School of Business, McMaster University, Hamilton, ON L8S 4L8, Canada
Xiaoran Jia: Lazaridis School of Business, Wilfrid Laurier University, Waterloo, ON N2L 3C5, Canada
Justin Yiqiang Jin: DeGroote School of Business, McMaster University, Hamilton, ON L8S 4L8, Canada
Kiridaran Kanagaretnam: Schulich School of Business, York University, Toronto, ON M3J 1P3, Canada
Gerald J. Lobo: C. T. Bauer College of Business, University of Houston, Houston, TX 77058, USA

JRFM, 2023, vol. 17, issue 1, 1-35

Abstract: We explore how expansionary monetary policy (EMP) influences bank loan loss provisioning. We find that banks’ discretionary loan loss provisions (DLLPs) increase during periods of EMP. This effect is stronger for banks with greater risk-taking, a larger proportion of influential stakeholders, lower ex-ante transparency of loan loss provisions, and more stringent bank regulation, which is consistent with external stakeholders requiring more conservative and timelier loan loss provisioning. We also find that both the timeliness and the validity of banks’ loan loss provisions (LLPs) increase during EMP periods. Our results are robust to the use of instrumental variable estimation and exogenous variations in monetary policy. Lastly, we show that conservative (i.e., higher DLLPs) and timely loan loss provisioning discipline banks from excessive risk-taking during periods of EMP.

Keywords: expansionary monetary policy; loan loss provisions; loan loss provision timeliness; conservative loan loss accounting (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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