Discussion paper

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

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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Citation

Peydro, J, G Ormazabal, B Morais, M Roa and M Sarmiento (2020), ‘DP15278 Forward looking loan provisions: Credit supply and risk-taking ‘, CEPR Discussion Paper No. 15278. CEPR Press, Paris & London. https://cepr.org/publications/dp15278