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The Effect of Credit Competition on Banks’ Loan-Loss Provisions

Published online by Cambridge University Press:  04 April 2018

Yiwei Dou ,
Stephen G. Ryan  and
Youli Zou
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 3 , June 2018 , pp. 1195 - 1226
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Tara Rice for providing her state-level interstate branching restriction data and Allan Collard-Wexler for providing his contiguous-county data. We thank Dick Sylla and Larry White for insights regarding the historical development of bank regulation. We thank Jeff Callen, Daniel Cohen, Giovanni Dell’Ariccia (the referee), Richard Frankel, Wayne Guay, Scott Liao, Alvis Lo, Paul Malatesta (the editor), and seminar participants at New York University, Leeds University Business School, the 2013 NYU summer camp, the 2013 London Business School symposium, the 2013 Yale fall conference, the 2013 American Accounting Association annual meeting, and Georgetown University for useful comments on prior versions of the paper.

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