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Policy uncertainty and loan loss provisions in the banking industry

  • Jeffrey Ng
  • Walid Saffar
  • Janus Jian ZhangEmail author
Article
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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.

Keywords

Policy uncertainty Accruals estimates Banking Loan loss provisions Earnings management 

JEL classification

G21 M41 G32 

Notes

Acknowledgements

We thank Scott Baker, Rui Ge, Yuan Huang, Chao Kang, Jungbae Kim, Kwangwoo Park, Katherine Schipper, John Wei, and participants in the workshop at the Hong Kong Polytechnic University, the 2018 Global PhD Colloquium, and the 2019 Hawaii Accounting Research Conference for helpful comments. We gratefully acknowledge financial support from the Hong Kong Polytechnic University. Any errors are our own.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2020

Authors and Affiliations

  1. 1.School of Accounting and FinanceThe Hong Kong Polytechnic UniversityHong KongPeople’s Republic of China

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