Loan Loss Provisioning in Community Banks – A Study with New Community Banking Data
Date
2019-02-21
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
ORCID
Type
Thesis
Degree Level
Masters
Abstract
We use a new community banking data set constructed by Federal Deposits Insurance Corporation to examine loan loss provisioning in U.S. community banks. We find that community banks use loan loss provisions to smooth their income. In addition, we find community banks employ a dynamic income smoothing process using loan charge-offs to keep allowance account flat overtime. Our evidence shows that loan loss provision is responsive to variations in local economic conditions. We do not find evidence that loan loss provisioning differs between standalone community banks and the community banks that are part of bank holding companies. Specifically, we do not find evidence that community banks that are part of bank holding companies are less aggressive in income smoothing than standalone community banks. However, our study provides evidence that traded community banks do not indulge in income smoothing. One possible explanation could be the stricter scrutiny from regulators, investors and analysts. Our study complements to the bank income smoothing literature by investigating the income smoothing of community banks.
Description
Keywords
loan loss provisioning, income smoothing, community bank
Citation
Degree
Master of Science (M.Sc.)
Department
Finance
Program
Finance