Loan loss provision index and bank risk: An empirical study in Indonesia
-
Author(s)Jasman JasmanLink to ORCID Index: https://orcid.org/0000-0002-7602-5883
,
Etty MurwaningsariLink to ORCID Index: https://orcid.org/0000-0002-9720-6392
-
DOIhttp://dx.doi.org/10.21511/bbs.17(2).2022.03
-
Article InfoVolume 17 2022, Issue #2, pp. 27-36
- 778 Views
-
905 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
The purpose of this study is to determine an index for loan loss provision as a new measurement and examine its effect on bank risk. The study also compared the results with a commonly used measurement, which is the ratio of loan loss provision (LLP). The population of this study is all conventional banks, including foreign banks with branch offices in Indonesia. The period of observation is from 2015 to 2018. The sample selection based on the purposive sampling method resulted in 86 banks. This study used panel data analysis. The data were collected from the annual reports of each bank and the website of the Financial Services Authority. The research findings show that the index of loan loss provision can decrease credit risk, liquidity risk, and operational risk. Meanwhile, the ratio of the loan loss provision only affects operational risk and does not affect credit risk and liquidity risk. The findings of this study suggest that the index for loan loss provision is more suitable to be used as an alternative measurement in the research design related to loan loss provision because the implementation of IFRS 9 requires more detailed disclosure of how banks estimate the amount of loan loss provision.
- Keywords
-
JEL Classification (Paper profile tab)E44, E58, G21, G32
-
References42
-
Tables2
-
Figures0
-
- Table 1. Descriptive statistics
- Table 2. Hypothesis testing
-
- Abidin, Z., Prabantarikso, R. M., Wardhani, R. A., & Endri, E. (2021). Analysis of bank efficiency between conventional banks and regional development banks in Indonesia. Journal of Asian Finance, Economics, and Business, 8(1), 741-750.
- Agénor, P. R., & Zilberman, R. (2015). Loan loss provisioning rules, procyclicality, and financial volatility. Journal of Banking and Finance, 61, 301-315.
- Bank for International Settlements (BIS). (2015). Guidance on credit risk and accounting for expected credit losses.
- Bikker, J. A., & Metzemakers, P. A. J. (2005). Bank provisioning behavior and procyclicality. Journal of International Financial Markets, Institutions, and Money, 15(2), 141-157.
- Bitar, M., Saad, W., & Benlemlih, M. (2016). Bank risk and performance in the MENA region: The importance of capital requirements. Economic Systems, 40(3), 398-421.
- Bouvatier, V., Lepetit, L., & Strobel, F. (2014). Bank income smoothing, ownership concentration, and the regulatory environment. Journal of Banking and Finance, 41(1), 253-270.
- Bushman, R. M., & Williams, C. D. (2012). Accounting discretion, loan loss provisioning, and discipline of Banks’ risk-taking. Journal of Accounting and Economics, 54(1), 1-18.
- Calomiris, C. W., Heider, F., & Hoerova, M. (2018). A theory of bank liquidity requirements. SSRN Electronic Journal, 4, 41-63.
- Cho, M., & Chung, K. H. (2016). The effect of commercial banks’ internal control weaknesses on loan loss reserves and provisions. Journal of Contemporary Accounting and Economics, 12(1), 61-72.
- Curcio, D., & Hasan, I. (2015). Earnings and capital management and signaling: The use of loan-loss provisions by European banks. European Journal of Finance, 21(1), 26-50.
- European Banking Authority (EBA). (2020). Final report: Guidelines on loan origination and monitoring.
- Fiordelisi, F., Soana, M. G., & Schwizer, P. (2013). The determinants of reputational risk in the banking sector. Journal of Banking and Finance, 37(5), 1359-1371.
- Gambacorta, L., & Mistrulli, P. E. (2004). Does bank capital affect lending behavior? Journal of Financial Intermediation, 13(4), 436-457.
- Gavana, G., Gottardo, P., & Moisello, A. M. (2017). The effect of equity and bond issues on sustainability disclosure: Family vs non-family Italian firms. Social Responsibility Journal, 13(1), 126-142.
- Ghenimi, A., Chaibi, H., & Omri, M. A. B. (2017). The effects of liquidity risk and credit risk on bank stability: Evidence from the MENA region. Borsa Istanbul Review, 17(4), 238-248.
- Huang, D. F., & Wang, C. L. (2013). Book-tax differences and earnings quality for the banking industry: Evidence from Taiwan. Pacific Accounting Review, 25(2), 145-164.
- Im, C. C., Kim, J. H., & Choi, M. K. (2016). Dividend policy and earnings management: Based on discretionary accruals and real earnings management. International Journal of U- and E-Service, Science, and Technology, 9(2), 137-150.
- Jasman, J., Murwaningsari, E., Mayangsari, S., & Mulyani, S. D. (2021). The effect of earnings management and signaling on loan loss provision: the role of bank capitalization. Journal of Finance and Banking Review, 6(1), 43-50.
- Jin, J., Kanagaretnam, K., & Lobo, G. J. (2018). Discretion in bank loan loss allowance, risk-taking, and earnings management. Accounting and Finance, 58(1), 171-193.
- Jreisat, A., & Bawazir, H. (2021). Determinants of banks profitability in the Middle East and North Africa Region. Journal of Asian Finance, Economics, and Business, 8(6), 701-711.
- Kanagaretnam, K., Lim, C. Y., & Lobo, G. J. (2010). Auditor reputation and earnings management: International evidence from the banking industry. Journal of Banking and Finance, 34(10), 2318-2327.
- Kanagaretnam, K., Lobo, G. J., & Yang, D.-H. (2004). Joint tests of signaling and income smoothing through bank loan loss provisions. Contemporary Accounting Research, 21(4), 843-884.
- Klomp, J., & Haan, J. D. (2012). Banking risk and regulation: Does one size fit all? Journal of Banking and Finance, 36(12), 3197-3212.
- Kolsi, M. C., & Grassa, R. (2008). Did corporate governance mechanisms affect earnings management? Further evidence from GCC Islamic banks. International Journal of Islamic and Middle Eastern Finance and Management, 34(10).
- Laeven, L., & Majnoni, G. (2003). Loan loss provisioning and economic slowdowns: Too much, too late? Journal of Financial Intermediation, 12(2), 178-197.
- Lassoued, N., Ben Rejeb Attia, M., & Sassi, H. (2017). Earnings management and ownership structure in an emerging market: Evidence from the banking industry. Managerial Finance, 43(10), 1117-1136.
- Lee, T. H., & Chih, S. H. (2013). Does financial regulation affect the profit efficiency and risk of banks? Evidence from China’s commercial banks. North American Journal of Economics and Finance, 26, 705-724.
- Leventis, S., Dimitropoulos, P. E., & Anandarajan, A. (2011). Loan loss provisions, earnings management, and capital management under IFRS: The case of EU commercial banks. Journal of Financial Services Research, 40(1), 103-122.
- Lobo, G. J. (2017). Accounting research in banking: A review. China Journal of Accounting Research, 10(1), 1-7.
- Majumder, M. T. H., & Li, X. (2018). Bank risk and performance in an emerging market setting: The case of Bangladesh. Journal of Economics, Finance and Administrative Science, 23(46), 199-229.
- Muliati, M., Mayapada, A. G., Parwati, N. M. S., Ridwan, R., & Salmita, D. (2021). Does audit matter in the earnings quality of Indonesia Banks? Journal of Asian Finance, Economics, and Business, 8(2), 143-150.
- Novotny-Farkas, Z. (2016). The interaction of the IFRS 9 expected loss approach with supervisory rules and implications for financial stability. Accounting in Europe, 13(2), 197-227.
- Ozili, P. K. (2015). Loan loss provisioning, income smoothing, signaling, capital management, and procyclicality: Does IFRS matter? Empirical evidence from Nigeria. Mediterranean Journal of Social Sciences, 6(2), 224-232.
- Ozili, P. K. (2017). Bank earnings smoothing, audit quality and procyclicality in Africa: The case of loan loss provisions. Review of Accounting and Finance, 16(2), 142-161.
- Ozili, P. K., & Outa, E. (2017). Bank loan loss provisions research: A review. Borsa Istanbul Review, 17(3), 144-163.
- PricewaterhouseCoopers (PwC). (2016). A look at current financial reporting issues.
- Rasa, R. (2021). The effects of credit risk on the profitability of commercial banks in Afghanistan. Journal of Asian Finance, Economics, and Business, 8(7), 477-489.
- Saunders, A., Strock, E., & Travlos, N. G. (1990). Ownership structure, deregulation, and bank risk-taking. The Journal of Finance, 45(2), 643-654.
- Shehzad, C. T., & De Haan, J. (2013). Was the 2007 crisis really a global banking crisis? North American Journal of Economics and Finance, 24(1), 113-124.
- Shrieves, R. E., & Dahl, D. (2003). Discretionary accounting and the behavior of Japanese banks under financial duress. Journal of Banking and Finance, 27(7), 1219-1243.
- The International Accounting Standards Board (IASB). (2018). IASB publishes a revised conceptual framework for financial reporting.
- Zhang, J., Jiang, C., Qu, B., & Wang, P. (2013). Market concentration, risk-taking, and bank performance: Evidence from emerging economies. International Review of Financial Analysis, 30(71303255), 149-157.
-
Evaluation of empirical attributes for credit risk forecasting from numerical data
Investment Management and Financial Innovations Volume 14, 2017 Issue #1 pp. 9-18 Views: 3539 Downloads: 1425 TO CITE АНОТАЦІЯIn this research, the authors proposed a new method to evaluate borrowers’ credit risk and quality of financial statements information provided. They use qualitative and quantitative criteria to measure the quality and the reliability of its credit customers. Under this statement, the authors evaluate 35 features that are empirically utilized for forecasting the borrowers’ credit behavior of a Greek Bank. These features are initially selected according to universally accepted criteria. A set of historical data was collected and an extensive data analysis is performed by using non parametric models. Our analysis revealed that building simplified model by using only three out of the thirty five initially selected features one can achieve the same or slightly better forecasting accuracy when compared to the one achieved by the model uses all the initial features. Also, experimentally verified claim that universally accepted criteria can’t be globally used to achieve optimal results is discussed.
-
The determinants of liquidity risk of commercial banks in Vietnam
Tu T. T. Tran ,
Yen T. Nguyen ,
Thuy T.H. Nguyen ,
Long Tran
doi: http://dx.doi.org/10.21511/bbs.14(1).2019.09
Banks and Bank Systems Volume 14, 2019 Issue #1 pp. 94-110 Views: 1956 Downloads: 1188 TO CITE АНОТАЦІЯThis research identifies factors that explain the liquidity of commercial banks in the Vietnam banking system from 2010 to 2015. Using the OLS regression method for analysis, it was found that:
- the interbank market helps commercial banks improve their liquidity;
- the larger the loan size, the higher the liquidity risk;
- good credit risk management has a positive impact on liquidity risk management; and
- long-term interest rate is negatively related to the liquidity of commercial banks.
The research also makes recommendations on liquidity risk management policies to banks and policy-makers from the Government and the State Bank of Vietnam.
-
The impact of credit risk and macroeconomic factors on profitability: the case of the ASEAN banks
Myra V. De Leon
doi: http://dx.doi.org/10.21511/bbs.15(1).2020.03
Banks and Bank Systems Volume 15, 2020 Issue #1 pp. 21-29 Views: 1860 Downloads: 642 TO CITE АНОТАЦІЯThis study investigates the effect of credit risk and macroeconomic factors on profitability of 20 ASEAN banks, particularly from Indonesia, Malaysia, Thailand and Philippines, covering the period of 2012 to 2017. The unbalanced panel data were tested for heteroscedasticity and normality. A fixed effects model and a random effects model were utilized followed by simple ordinary least squares (OLS) regression. The obtained results show that credit risk and GDP growth negatively affect Return on Equity (ROE) at 5% level of significance. The inflation rate increases ROE by 0.323%. In terms of influence, inflation has the highest impact on ROE followed by GDP growth and credit risk. Credit risk and GDP growth negatively affect Return on Assets (ROA) at 5% level of significance. ROA was also influenced by an increase in inflation rate. Therefore, this study will help banks and bank managers, depositors, investors, policy makers and governments to identify factors affecting bank profitability.
