Conservative Loan Loss Allowance and Bank Lending

Takasu, Yoko; Nakano, Mikio

doi:10.13106/jafeb.2019.vol6.no3.9

Cited by 5 publications

(5 citation statements)

References 27 publications

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“…As the economy expands, the demand for bank loans increases (Takasu and Nakano, 2020). The growth of the gross domestic product (GDP) had been found to be consistently significant in affecting NPLs (Mustafa and Ali, 2019).…”

Section: Review Of Literaturementioning

confidence: 99%

Dynamic implications of GDP, interest rates, taxes, income, foreign direct investments, housing prices on property NPLs

Tham¹,

Said²,

Adnan³

2021

IJHMA

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Purpose The study on how macroeconomic factors affect non-performing loans (NPLs) have not been focussed on property loans, which had been amongst the largest contributor of NPLs in many countries. At the same time, whilst there are many studies that focusses on NPLs during the recession and financial crises, not many studies focus on how macroeconomic factors affect property NPLs in a recovering economic environment. The purpose of this study seeks to fill the gap by analysing the relationships between gross domestic product (GDP), interest rates, income, foreign direct investments (FDI), housing prices and taxes on property NPLs with Malaysia as a case study in which NPLs rose for the first time after declining for almost a decade since the 2008–2009 global financial crisis. This study aims to understand the dynamics and direction of causation in relationships. Design/methodology/approach The author uses the auto regressive distribution lag analysis between the independent variables of GDP, interest rates, housing prices, service taxes, percapita income and FDI affecting the dependent variable of property NPLs from 2009 to 2017, during a unique period of recovering economic environment where NPLs rose for the first time in almost a decade of decline. Findings This study found that interest rates, housing prices, income, GDP and service taxes were found to possess long cause effects and long run elasticity with NPLs. At the same time, interest rates were found to implicate property NPLs significantly in longer periods, followed by GDP, housing prices, service taxes and income. FDIs were found to be insignificantly negative in implicating property NPLs in the long run. Research limitations/implications This paper allows policymakers to understand the dynamic implications of crucial macroeconomic factors in affecting NPLs so that appropriate strategic monetary policies could be formulated towards addressing them. More focus shall be given to addressing the long term implications of these factors on NPLs. Practical implications Appropriate strategic monetary policy making can be channelled towards addressing these factors via understanding the short and long term implications of macroeconomic variables on property NPLs. Policymakers can take note of the long cause effects and long run elasticity of average interest rates, housing prices, income levels, GDP and service taxes with property NPLs so that appropriate long term policies can be addressed to control the rise of property NPLs in the country. At the same time, priority should be given towards strengthening of the GDP of the country due to its strongest impact in long term effects with reduction of NPLs in the country. Social implications The insights from the present study suggest policymakers interested in bringing stability in the real estate finance system need to account for the various macroeconomic variables found in this study. Originality/value The paper is novel on at least two dimensions. First, this study involves focussing on a unique period of recovering economic environment where NPLs rose for the first time after a decade of decline since recovering from the 2008–2009 global financial crisis. At the same time, this study focusses on property NPLs, which is unique in nature compared to general NPLs. This study had enabled policymakers to better understand the dynamic implications of several macroeconomic variables affecting property NPLs and assist them in strategic monetary policy making.

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Section: Review Of Literaturementioning

confidence: 99%

Dynamic implications of GDP, interest rates, taxes, income, foreign direct investments, housing prices on property NPLs

Tham¹,

Said²,

Adnan³

2021

IJHMA

View full text Add to dashboard Cite

show abstract

“…Bank risk also depends significantly on the business cycle (Bikker & Metzemakers, 2005;Takasu & Nakano, 2019). The existing literature, which focuses on either the effect of business cycle on lending, bank capital and on bank stability or cyclical behavior of bank risk.…”

Section: Literature Reviewmentioning

confidence: 99%

Financial Development, Business Cycle and Bank Risk in Southeast Asian Countries

Son¹,

Nguyen²

2020

JAFEB

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The paper aims to examine whether business cycles affect the link between financial development and bank risk, measured by Zscore and nonperforming loans to total loans in six Southeast Asian countries, namely Indonesia, Philippines, Malaysia, Singapore, Thailand and Vietnam. This study uses a sample of 95 listed commercial banks over a 15-year period between 2004 and 2018 in the six Southeast Asian countries. This study employs panel OLS regression and modifications to tackle issues such as endogeneity and heteroscedasticity. The results show that the impact of stock market development (the ratio of the market capitalization to GDP) on Zscore is significantly positive, whereas its effect on non-performing loans is significantly negative. The findings suggest that financial development, in terms of stock market capitalization, improves banks' Zscores and reduces their level of non-performing loans, suggesting that financial development on average reduces bank risk. The impact of business cycle is insignificant towards bank risk, thus rejecting both counter-and pro-cyclical hypotheses, except for the case of risk indicator of loan loss provisions. Examining the joint effect of the business cycle and financial development on bank risk, we find that the phase of business cycles generally does not moderate the link between financial development and bank risk.

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“…Allen et al (2013), Chen and Wu (2014), Choi et al (2013), Fungáčováa et al (2013), Ferri et al (2014) and Gambacorta and Marques-Ibanez (2003) found a significant positive sign between capital and loans Measuring the risk of using Loan Loss Provision. Loan loss provisions can be an important prudential instrument for emerging countries because they play a role in the banking system, especially financial intermediation (Saurina, 2009;Bouvatier & Lepetit, 2012;Takasu & Nakano, 2019). Jiménez and Saurina (2006) show that there is a direct relationship between credit growth and credit risk, so that the rapid increase in loan portfolio is positively associated with an increase in the ratio of non-performing loans in the future.…”

Section: Bank Specific Determinantsmentioning

confidence: 99%

Determinants of Micro-, Small- and Medium-Sized Enterprise Loans by Commercial Banks in Indonesia

Yudaruddin¹

2020

JAFEB

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This paper investigates, in a single equation framework, the effect of bank-specific and macroeconomic determinants on micro-, smalland medium-sized loans by commercial banks in Indonesia. This study uses a sample of 790 observations from 79 commercial banks in Indonesia over the years 2006-2015. This study uses two estimation methods for our panel regressions: static and dynamic generalized method of moments (GMM) panel estimator. In static relationships, the literature usually uses the least square methods on fixed effects (FE) or random effects (RE). I found evidence that all banks, bank profitability and size are positively and significantly related to micro-, smalland medium-sized loans, while the coefficients of liquidity are significantly positive in all specifications, except government banks which is significantly negative. The relationship between risk and credit growth is negative for non-government banks. All estimated equations show that the effect of the capital variable on lending banks to MSMEs is not important in government banks and non-government banks. Finally, macroeconomic variables, such as inflation and gross domestic product, clearly affect the lending of the banking sector particularly non-state banks. The findings have several policy implications to Indonesia government, regulatory authority and bank managers in order to improve bank profitability through bank lending.

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Conservative Loan Loss Allowance and Bank Lending

Cited by 5 publications

References 27 publications

Dynamic implications of GDP, interest rates, taxes, income, foreign direct investments, housing prices on property NPLs

Dynamic implications of GDP, interest rates, taxes, income, foreign direct investments, housing prices on property NPLs

Financial Development, Business Cycle and Bank Risk in Southeast Asian Countries

Determinants of Micro-, Small- and Medium-Sized Enterprise Loans by Commercial Banks in Indonesia

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