Forward Looking Loan Provisions: Credit Supply and Risk-taking

• Authors: José-Luis Peydró.
• BSE Working Paper: 110671 | September 20
• Keywords: loan provisions , IFRS9 , ECL , corporate real and credit supply effects of accounting , bank risk-taking
• JEL codes: E31, G18, G21, G28
• loan provisions
• IFRS9
• ECL
• corporate real and credit supply effects of accounting
• bank risk-taking

e show corporate-level real, financial, and (bank) risk-taking effects associated with calculating loan provisions based on expected-rather than incurred-credit losses. For identification, we exploit unique features of a Colombian reform and supervisory, matched loan-level data. The regulatory change induces a dramatic increase in provisions. Banks tighten all new lending conditions, adversely affecting borrowing-firms, with stronger effects for risky-firms. Moreover, to minimize provisioning, more affected (less-capitalized) banks cut credit supply to risky-firms- SMEs with shorter credit history, less tangible assets or more defaulted loans-but engage in “search-for-yield” within regulatory constraints and increase portfolio concentration, thereby decreasing risk diversification.