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.
|Place of Publication||Tilburg|
|Publisher||CentER, Center for Economic Research|
|Number of pages||52|
|Publication status||Published - 30 Sep 2020|
|Name||CentER Discussion Paper|
- Loan provisions
- corporate real and credit supply effects of accounting
- bank risk-taking
Morais, B., Ormazabal, G., Peydro, J. L., Roa, M., & Sarmiento Paipilla, M. (2020). Forward Looking Loan Provisions: Credit Supply and Risk-Taking. (CentER Discussion Paper; Vol. 2020-027). CentER, Center for Economic Research.