Policy uncertainty and loan loss provisions in the banking industry

Jeffrey Ng, Walid Saffar, Janus Jian Zhang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

11 Citations (Scopus)

Abstract

Policy uncertainty is an increasingly important issue in many economies. Extensive evidence indicates that higher policy uncertainty is associated with future negative macroeconomic and microeconomic conditions. In this paper, we examine how policy uncertainty affects banks’ accruals for loan losses. Consistent with banks signaling more expected loan losses, we document that in times of higher policy uncertainty, banks make more loan loss provisions. This positive association is more pronounced for banks that were previously less prudent in their risk-taking and loan loss reserving, indicating that less prudent banks are harmed more by loan losses in difficult times. We also show that higher attention paid to a banks’ financial reporting strengthens the role of loan loss provisions as a signal of expected loan losses. Overall, our paper offers insight into how, in the face of policy uncertainty, banks convey information about their loan portfolios to their stakeholders.

Original languageEnglish
Pages (from-to)726-777
Number of pages52
JournalReview of Accounting Studies
Volume25
Issue number2
DOIs
Publication statusPublished - 1 Jun 2020

Keywords

  • Accruals estimates
  • Banking
  • Earnings management
  • Loan loss provisions
  • Policy uncertainty

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)

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