DP15278 Forward looking loan provisions: Credit supply and risk-taking

Author(s):	Bernardo Morais, Gaizka Ormazabal, José Luis Peydró, Monica Roa, Miguel Sarmiento
Publication Date:	September 2020
Keyword(s):	bank risk-taking, corporate real and credit supply effects of accounting, ECL, IFRS9, loan provisions
JEL(s):	E31, G18, G21, G28
Programme Areas:	International Macroeconomics and Finance
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=15278

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.