Are Banks Forward-Looking in Their Loan Loss Provisioning? Evidence from the Senior Loan Officer Opinion Survey (SLOOS)
||Original Paper: WP 13-13|
This paper makes a fundamental contribution by studying loan-loss provisioning over the credit cycle as three distinct phases. Looking at the three distinct phases of the financial crisis—the precrisis period, crisis period, and postcrisis period— is important as loan-loss provisioning is driven by different factors in each, in part due to extensive shifts in (or in the application of) regulatory rule. We show evidence of forward-looking loan-loss provisioning by utilizing Senior Loan Officer Opinion Surveys (SLOOS), which provide useful controls for credit cycle information. Though the SLOOS dataset is a restricted sample and generalizability to a broader sample could potentially be a stretch, we control for credit cycle factors as part of an identification strategy to sort out changes in the credit market equilibrium. We contribute to the growing literature on forward-looking loan-loss provisioning and early-in-the-cycle loss recognition by incorporating a broader range of available credit information.
Keywords: Loan loss provisioning, forward-looking, income smoothing, capital management, early loss recognition.
JEL codes: G21, G18.
Suggested citation: Balasubramanyan, Lakshmi, Saeed Zaman, and James B. Thomson, 2014. “Are Banks Forward-Looking in Their Loan-Loss Provisioning? Evidence from the Senior Loan Officer Opinion Survey (SLOOS)” Federal Reserve Bank of Cleveland, Working Paper no. 13-13R.