Loan Loss Provisioning of Us Banks: Economic Policy Uncertainty and Discretionary Behavior
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Date
2021
Authors
Öztürk Danışman, Gamze
Demir, Ender
Ozili, Peterson K.
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier Inc
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Abstract
This paper examines the effect of economic policy uncertainty (EPU) on loan loss provisions (LLP). Using a sample of 6384 US banks and yearly data from 2009 to 2019 and addressing endogeneity (GMM and IV estimations), the findings reveal that in times of higher economic policy uncertainty, banks tend to increase their loan loss provisioning. Considering the four components of EPU, the findings document that the majority of the explanatory power on loan loss provisions originates from news-based and tax expiration indices. Moreover, US banks discretionally use loan loss provisions in normal times, especially for capital management and income smoothing. In uncertain times, they use provisions for income smoothing rather than capital management and after controlling for the discretionary behavior, the positive relationship of EPU and LLPs continue to hold. Additional analysis indicates that private banks conduct more income smoothing through provisions in uncertain times as compared to listed banks. The findings of the study highlight EPU as an additional procyclical factor to influence bank provisioning behavior and offer some relevant policy implications.
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Keywords
Banks, Capital management, Economic policy uncertainty, Income smoothing, Loan loss provisions, Procyclicality
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Fields of Science
Citation
42
WoS Q
Q2
Scopus Q
Q1
Source
Volume
71
Issue
Start Page
923
End Page
935