Do delays in expected loss recognition affect banks' willingness to lend?
Banks can decrease their future capital inadequacy concerns by reducing lending. The capital crunch theory predicts that lending is particularly sensitive to regulatory capital constraints during recessions, when regulatory capital declines and external-financing frictions increase. Regulators and policy makers argue that the current loan loss provisioning rules magnify this pro-cyclicality. Exploiting variation in the delay in expected loss recognition under the current incurred loss model, we find that reductions in lending during recessionary relative to expansionary periods are lower for banks that delay less. We also find that smaller delays reduce the recessionary capital crunch effect. These results hold across management quality partitions.
Year of publication: |
2011
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Authors: | Beatty, Anne ; Liao, Scott |
Published in: |
Journal of Accounting and Economics. - Elsevier, ISSN 0165-4101. - Vol. 52.2011, 1, p. 1-20
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Publisher: |
Elsevier |
Keywords: | Loss recognition Lending Banks Capital constraints Pro-cyclicality |
Saved in:
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