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Title: Forward looking loan provisions: Credit supply and risk-taking

Author(s): Bernardo Morais, Gaizka Ormazabal, José Luis Peydró, Monica Roa and Miguel Sarmiento

Publication Date: September 2020

Keyword(s): bank risk-taking, corporate real and credit supply effects of accounting, ECL, IFRS9 and loan provisions

Programme Area(s): International Macroeconomics and Finance

Abstract: We 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.

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Bibliographic Reference

Morais, B, Ormazabal, G, Peydró, J, Roa, M and Sarmiento, M. 2020. 'Forward looking loan provisions: Credit supply and risk-taking '. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15278