The Effect of Credit Competition on Banks' Loan-Loss Provisions. (4th April 2018)

• Record Type: Journal Article
• Authors: Dou, Yiwei; Ryan, Stephen G.; Zou, Youli
• Is Part Of: Journal of financial and quantitative analysis. Volume 53:Number 3(2018)
• Page Start: 1195
• Page End: 1226
• Publication Date: 2018-04-04
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109018000054
• Languages: English
• ISSNs: 0022-1090

Abstract

Abstract : Exploiting differential interstate-branching deregulation across contiguous counties of adjacent states, we investigate the effect of entry threat on incumbent banks' loan-loss provisions. Incumbents exposed to entry threat have offsetting incentives; lower provisions make their loan-underwriting quality appear better, deterring entry, but make local economic conditions appear better, encouraging entry. We find that the incentive to increase apparent loan-underwriting quality dominates on average. We further find that this incentive is stronger in counties with a higher proportion of heterogeneous loans, while the other incentive dominates in counties with both low heterogeneous loans and highly volatile economic conditions.