Bank provisioning practice during the pandemic: evidence from the COVID-19 outbreak

ABSTRACT

We investigate whether, and to what extent, banks exploit their discretion over loan loss provisions to achieve their management purposes during the pandemic. Using a sample of US banks during the current COVID-19 outbreak, we find that banks are more eager to use discretionary loan loss provisions in response to the worsening pandemic situation. We find in particular that banks use discretionary loan loss provisions to manage regulatory capital, smooth income and signal private information to outsiders. Overall, this paper enriches the literature on bank discretionary behaviour during the difficult time, especially during the current COVID-19 pandemic, and therefore, it has important implications for banking supervisor and bank stakeholders.