Loan Loss Provisions and Lending Behavior of Banks: Do Information Sharing and Borrower Legal Rights Matter?

Wahyoe Soedarmono (1) , Amine Tarazi (2) , Agusman Agusman (3) , Gary S. Monroe (4) , Dominic Gasbarro (5)

1 Universitas Siswa Bangsa Internasional, Faculty of Business / Sampoerna School of Business
2 LAPE - Laboratoire d'Analyse et de Prospective Economique
3 bank indonesia
4 UNSW - University of New South Wales [Sydney]
5 Murdoch University

We examine the roles of information sharing and borrower’s legal rights in affecting the procyclical effect of bank loan loss provisions. Based on a sample of Asian banks, our empirical results highlight that higher non-discretionary provisions reduce loan growth and, hence, non-discretionary provisions are procyclical. A closer investigation suggests that better information sharing through public credit registries managed by central banks, not private credit bureaus managed by the private sector, might substitute for the role of dynamic provisioning systems in mitigating the procyclicality of non-discretionary provisions. We also document that higher discretionary provisions in countries with stronger legal rights for borrowers temper the procyclical effect of non-discretionary provisions. However, these findings hold only for small banks. This suggests that the implementation of dynamic provisioning systems to mitigate the procyclicality of non-discretionary provisions is more crucial for large banks.

Mots clés: Information sharing; Loan loss provisions; Loan growth; Borrower’s legal rights

Domaines: Economies et finances

Wahyoe Soedarmono, Amine Tarazi, Agusman Agusman, Gary S. Monroe, Dominic Gasbarro. Loan Loss Provisions and Lending Behavior of Banks: Do Information Sharing and Borrower Legal Rights Matter?. 2016. ⟨hal-01316717⟩