Working Paper: CEPR ID: DP15278
Authors: Jos Luis Peydr; Gaizka Ormazabal; Bernardo Morais; Monica Roa; Miguel Sarmiento
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. Theregulatory 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.
Keywords: loan provisions; IFRS9; ECL; corporate real and credit supply effects of accounting; bank risk-taking
JEL Codes: E31; G18; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Introduction of ECL provisioning scheme (SARC) (H55) | Increase in provisions for smaller firms (L25) |
| Increase in provisions for smaller firms (L25) | Tightening of credit conditions (E51) |
| Tightening of credit conditions (E51) | Reduction in loan value to smaller firms (G32) |
| Tightening of credit conditions (E51) | Increase in interest rates for smaller firms (E43) |
| Banks with lower capital (G21) | Avoid lending to riskier borrowers (G21) |
| Avoid lending to riskier borrowers (G21) | Increase in lending to higher-yield borrowers (G21) |
| Weaker banks (G21) | Reduce overall loan volume (G51) |
| Weaker banks (G21) | Increase concentration of loan portfolios (G51) |
| Increase concentration of loan portfolios (G51) | Decrease in risk diversification (G11) |
| New provisioning scheme (H42) | Induces banks to tighten credit (E51) |
| Tightening of credit (E51) | Slowdown in real activity among affected borrowers (E44) |