Loan Loss Provisioning of the U.S. Commercial Banks after the Financial Crisis

Abstract

As bank managers have informational advantage in screening and monitoring borrowers, loan loss provisions determined by bank managers may contain important information for outside investors and regulators. This paper adapts a time-series framework and finds that loan loss provision contains information for future non-performing loans during the post-crisis period. This indicates that U.S. commercial banks have been associated with enhanced risk-taking discipline [Bushman and Williams, 2012]. Secondly, high yield corporate bond spreads have contained information for future bad loans, and loan loss provisioning by bank managers has incorporated such information. Finally, when exercising the discretion of loan loss provisioning by bank managers, smoothing the long-run level of loan loss reserves has been considered. Traditional hypotheses such as earnings management, capital management or income signaling are not supported by the data.