The impact of tighter banking regulation on bank loan loss provisioning: empirical evidence from a quasi-natural experiment
Journal of Financial Regulation and Compliance
ISSN: 1358-1988
Article publication date: 20 July 2023
Issue publication date: 27 October 2023
Abstract
Purpose
The paper aims to examine the impact of tighter banking regulation on banks’ loan loss provisioning in an emerging market context.
Design/methodology/approach
The authors exploit the adoption of the Basel II Accord in Vietnam as a quasi-natural experiment and use Difference-to-Difference (DiD) method to examine the impact of tighter banking regulation on Vietnamese banks’ provisioning during the period of 2010–2019.
Findings
The paper finds that affected banks (i.e. those taking part in the pilot adoption programme) manage to reduce their provisions significantly compared to their control peers in the post-adoption period. More importantly, this paper further finds that the affected banks manage their provisions primarily for incomes smoothing and signalling. This paper also finds that those banks expand their lending significantly and experience an increase in financial performance in the post-adoption period. Overall, the results provide supports for the “borrowing from the future” proposition that banks may perceive that a tighter banking regulation provides them with growth opportunities, so they have the tendency to manipulate their provisions to facilitate their current income.
Originality/value
This paper contributes to the established literature on the manipulation of bank provisioning as well as the impact of banking regulation, and especially Basel II on bank economic decisions. As compared to prior literature, the adoption of Basel II in Vietnam provided an ideal shock for us to conduct a DiD design to estimate the causal impact of tighter banking regulation on banks’ provisioning practices.
Keywords
Citation
Luu, H.N., Vu, P.-T., Nguyen, D.T.T. and Hoang, T.G. (2023), "The impact of tighter banking regulation on bank loan loss provisioning: empirical evidence from a quasi-natural experiment", Journal of Financial Regulation and Compliance, Vol. 31 No. 5, pp. 696-713. https://doi.org/10.1108/JFRC-01-2023-0007
Publisher
:Emerald Publishing Limited
Copyright © 2023, Emerald Publishing Limited