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Forward looking loan provisions: Credit supply and risk-taking

Bernardo Morais, Gaizka Ormazabal, José-Luis Peydró (), Mónica Roa and Miguel Sarmiento
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José-Luis Peydró: https://www.upf.edu/web/econ/faculty/-/asset_publisher/6aWmmXf28uXT/persona/id/3420538

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We show corporate-level real, financial, and (bank) risk-taking effects associated with calculating loan provisions based on expected-rather than incurred-credit losses. For identification, we exploit unique features of a Colombian reform and supervisory, matched loan-level data. The regulatory change induces a dramatic increase in provisions. Banks tighten all new lending conditions, adversely affecting borrowing-firms, with stronger effects for risky-firms. Moreover, to minimize provisioning, more affected (less-capitalized) banks cut credit supply to risky-firms- SMEs with shorter credit history, less tangible assets or more defaulted loans-but engage in "search-for-yield" within regulatory constraints and increase portfolio concentration, thereby decreasing risk diversification.

Keywords: Loan provisions; IFRS9; ECL; corporate real and credit supply effects of accounting; bank risk-taking (search for similar items in EconPapers)
JEL-codes: E31 G18 G21 G28 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cfn, nep-mac and nep-rmg
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