Loan loss provisions and bank value: Relationship and the influence of economic policy uncertainty and non performing loans / Lai Wan Fei

Lai , Wan Fei (2024) Loan loss provisions and bank value: Relationship and the influence of economic policy uncertainty and non performing loans / Lai Wan Fei. PhD thesis, Universiti Malaya.

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Abstract

Loan loss provisions are utilized to mitigate potential loan losses, yet the relationship between these provisions and bank value has remained ambiguous, largely unexplored due to limitations in existing financial theories, regulatory standards, and empirical studies. These sources often fail to thoroughly examine how risk management practices, such as loan loss provisions, influence bank value, leaving a significant gap in knowledge. This study is the first to reveal a notable negative relationship between loan loss provisions and bank value, highlighting significant nonlinearity in loan loss provisions and the moderating impacts of economic policy uncertainty and non-performing loans, using a panel data regression analysis of US banking data. The nonlinear models indicate that reducing loan loss provisions could adversely affect bank value, potentially driven by the intention to increase compensation payouts. Conversely, the adoption of negative loan loss provisions appears to positively impact bank value, attributed to the generation of excess capital for enhancing financial stability. Furthermore, the detrimental effects of loan loss provisions on bank value are found to be mitigated by economic policy uncertainty and non-performing loans, with variations observed across different bank sizes, levels of prudence, and during financial crises. This study suggests the need for careful monitoring and regulation of loan loss provisioning to maintain high financial stability and integrity. These findings, which remain robust after extensive robustness and endogeneity checks, significantly advance the literature by providing a comprehensive understanding of the multifaceted impact of loan loss provisions on bank value.

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