Loan Loss Provisioning in Banking — A Dynamic Counter-cyclical Approach to Buffer Losses in China

Wang, Yu-Sheng (2017) Loan Loss Provisioning in Banking — A Dynamic Counter-cyclical Approach to Buffer Losses in China. [Dissertation (University of Nottingham only)]

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Abstract

Loan loss provisions (LLPs) were first introduced in 1986 to serve as a defence against the credit risk by banks. They are founded on the basis of future loss predictions on loan portfolios from banks. LLPs are currently very important to banks’ continuous operations, and global policy makers have crucial concerns about the effects of LLPs on lending strategy. In China, the loan loss provisioning system has been in operation since 1988. The system has received constant expansion and improvement due to various reforms. A new set of regulatory stipulations were put forward by the authorities to ameliorate Chinese LLPs. The aim is to keep pace with similar regulatory systems worldwide whilst accommodating China’s basic conditions on a national level. Through these regulatory improvements, banks’ profits (after pre-tax deduction) as well as the liquidity and safety of their assets are ensured.

However, there is a lack of investigation in China into LLPs usage to manage capital and earnings, despite of previous research by scholars such as Hasan and Hunter (1994), Bhat (1996) and Lobo and Yang (2001) into the subject. Therefore, this study investigates the factors affecting LLPs in Chinese banking industry by exploring manipulation motivations and other determinants of LLPs. In addition, this study tests the efficiency in Chinese banks. Findings do not uphold the hypothesis of income smoothing and capital management. However, the pro-cyclical provisioning behaviour in the Chinese banking system is proved by a significant negative correlation between LLPs and GDP growth.

In terms of layout, the first and second parts of the thesis provide the introduction and a detailed discussion of the concept of LLPs. Followed by section three assesses the banking industry’s reforms and advancements as well as the Chinese LLPs system. The remaining parts in sections four and five focus on empirical data analysis using the Stochastic Frontier Analysis (SFA) model and the Generalised Method of Moments (GMM) model to examine the existence of pro-cyclicality and income smoothing as well as capital management practice on a sample of 71 different types of Chinese banks over the years 2011-2016.

Item Type: Dissertation (University of Nottingham only)
Depositing User: WANG, Yusheng
Date Deposited: 12 Apr 2018 10:06
Last Modified: 17 Apr 2018 15:14
URI: http://eprints.nottingham.ac.uk/id/eprint/45979

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