Forward Looking Loan Provisions: Credit Supply and Risk-Taking

Bernardo Morais, Gaizka Ormazabal, J.L. Peydro, Monica Roa, Miguel Sarmiento Paipilla

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherEuropean Banking Center
Number of pages52
Publication statusPublished - 30 Sept 2020

Publication series

NameEBC Discussion Paper


  • Loan provisions
  • IFRS9
  • ECL
  • corporate real and credit supply effects of accounting
  • bank risk-taking


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