Bank's loan loss provisioning in large emerging countries: the role of motivation, capital buffer, business cycle and governance Online publication date: Tue, 16-Jan-2024
by Mochammad Doddy Ariefianto; Irwan Trinugroho
International Journal of Monetary Economics and Finance (IJMEF), Vol. 16, No. 6, 2023
Abstract: We model and empirically estimate the relationship of loan loss provision (LLP) with proxies of motivation, capital buffer, business cycle and country governance. Our dataset comprises of 546 commercial banks from 14 large emerging countries; annual frequency from 2014-2018 (2730 bank year observations). A novel econometric technique: linear dynamic panel data estimator using maximum likelihood and structural equation modelling (DPDML) is employed to cope with various complexity of the empirical model. We find that LLP is mainly consistent with following hypothesis: incurred loss, relaxed regulatory capital and contra cyclicality. The role of country governance is not particularly robust. Our findings provide important implication to policy making: substantial challenge to harmonising the bank LLP practices from current incurred loss to desired forward-looking perspective.
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