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Loan loss provisions and lending behaviour of banks: Asian evidence during 1992-2009

Soedarmono, W., Tarazi, A., Agusman, A., Monroe, G.S. and Gasbarro, D. (2013) Loan loss provisions and lending behaviour of banks: Asian evidence during 1992-2009. In: Accounting and Finance Association of Australia and New Zealand (AFAANZ), Perth, Western Australia, 7 - 9 July

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Abstract

Effects of loan loss provisioning on lending behaviour of banks remain a major concern in policy circles in order to strengthen both bank stability and financial intermediation. A sample of 686 commercial banks in Asian countries over the 1992 - 2009 period is used to identify factors contributing to the occurrence of a procyclical effect of loan loss provisions on loan growth. Our empirical results highlight that non-discretionary provisions have a procyclical effect, as higher non-discretionary provisions reduce loan growth of banks. This procyclical effect holds for large banks but not small banks. A closer investigation shows that bank market structure, economic development and institutional quality also affect the link between non-discretionary provisions and loan growth of banks. More specifically, higher bank competition, higher per capita income and higher rule of law mitigate the procyclical effect of non-discretionary provisions on loan growth regardless of whether banks are large or small. These findings have policy implications concerning the adoption of the dynamic provisioning system for Asian banks.

Publication Type: Conference Paper
URI: http://researchrepository.murdoch.edu.au/id/eprint/37856
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