1. Does uncertainty matter for loan charge-offs?
- Author
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Laetitia Lepetit, David G. Dickinson, Frank Strobel, Laboratoire d'Analyse et de Prospective Economique (LAPE), Gouvernance des Institutions et des Organisations (GIO), Université de Limoges (UNILIM)-Université de Limoges (UNILIM), and University of Birmingham [Birmingham]
- Subjects
Discretion,Loan charge-off,Uncertainty dependence,Real option ,Economics and Econometrics ,Collateral ,Financial economics ,Cross-collateralization ,media_common.quotation_subject ,Discretion ,Monetary economics ,Uncertainty dependence ,Charge-off ,Forgivable loan ,Term loan ,Bridge loan ,Capital management ,0502 economics and business ,Amortizing loan ,Economics ,050207 economics ,Non-conforming loan ,Real option ,media_common ,050205 econometrics ,Stylized fact ,050208 finance ,business.industry ,05 social sciences ,Charge (physics) ,050201 accounting ,[SHS.ECO]Humanities and Social Sciences/Economics and Finance ,Participation loan ,Loan ,Non-performing loan ,business ,Finance ,Smoothing ,Loan charge-off - Abstract
International audience; Using a stylized real options model, we show that discretion over the timing of charging off a non-performing loan could be economically justified when collateral values are uncertain and there is a chance of loan recovery. The implied hypothesis of an "uncertainty dependence" aspect in loan charge-offs is empirically tested and validated using a panel of European banks. A welfare-maximizing regulator might want to let banks pursue such discretionary loan charge-off behavior, with the problem of distinguishing it from alternative capital management and income smoothing objectives, while transparency-seeking accounting standards setters would presumably not. © 2011 Elsevier B.V.
- Published
- 2012
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