Department of Economics and Business - Universitat Pompeu Fabra

Title:: Forward looking loan provisions: Credit supply and risk-taking
Authors:: Bernardo Morais, Gaizka Ormazabal, José-Luis Peydró, Mónica Roa and Miguel Sarmiento
Date:: August 2020
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
JEL codes:: E31, G18, G21, G28.
Area of Research:: Finance and Accounting

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