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Forward-Looking Loan Loss Provisioning Under Imperfect Forecasts.

Record Type:	Language materials, manuscript : Monograph/item
Title/Author:	Forward-Looking Loan Loss Provisioning Under Imperfect Forecasts./
Author:	Vidinova, Hristiana Valentinova.
Description:	1 online resource (101 pages)
Notes:	Source: Dissertations Abstracts International, Volume: 85-12, Section: A.
Contained By:	Dissertations Abstracts International85-12A.
Subject:	Finance. -
Online resource:	click for full text (PQDT)
ISBN:	9798382782898

Forward-Looking Loan Loss Provisioning Under Imperfect Forecasts.
Vidinova, Hristiana Valentinova.

Forward-Looking Loan Loss Provisioning Under Imperfect Forecasts. - 1 online resource (101 pages)

Source: Dissertations Abstracts International, Volume: 85-12, Section: A.

Thesis (Ph.D.)--The University of Chicago, 2024.

Includes bibliographical references

The current expected credit losses (CECL) model stipulates that loan loss provisions should be forward-looking. I document that banks increasingly rely on macroeconomic forecasts following the implementation of CECL, yet most forecasts are not rational. I build a theoretical model to study the implications of CECL for bank provisions, lending, aggregate output in the economy, and bank stability. Additionally, I derive the optimal minimum capital requirement within the CECL framework. I first explore the implications under rational expectations and then consider bank expectations influenced by Kahneman and Tversky's (1972) representativeness heuristic to capture the empirical properties of macroeconomic forecasts. My model demonstrates that the representativeness heuristic results in overreaction to news, leading to underprovisioning, excessive lending and risk-taking in reaction to good news, and the opposite in reaction to bad news. Due to timely loan loss provisioning under CECL, the optimal capital constraint is time-varying in response to the macroeconomic conditions and the underlying risk in the economy. In contrast to rational expectations, the representativeness heuristic necessitates a binding capital constraint even when bank equity is high and the social cost of bank failure is low.

Electronic reproduction.
Ann Arbor, Mich. :
ProQuest,
2024

Mode of access: World Wide Web

ISBN: 9798382782898Subjects--Topical Terms:

559073
Finance.
Subjects--Index Terms:

Capital requirementsIndex Terms--Genre/Form:

554714
Electronic books.

Forward-Looking Loan Loss Provisioning Under Imperfect Forecasts.
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500 $a Advisor: Sapra, Haresh.
502 $a Thesis (Ph.D.)--The University of Chicago, 2024.
504 $a Includes bibliographical references
520 $a The current expected credit losses (CECL) model stipulates that loan loss provisions should be forward-looking. I document that banks increasingly rely on macroeconomic forecasts following the implementation of CECL, yet most forecasts are not rational. I build a theoretical model to study the implications of CECL for bank provisions, lending, aggregate output in the economy, and bank stability. Additionally, I derive the optimal minimum capital requirement within the CECL framework. I first explore the implications under rational expectations and then consider bank expectations influenced by Kahneman and Tversky's (1972) representativeness heuristic to capture the empirical properties of macroeconomic forecasts. My model demonstrates that the representativeness heuristic results in overreaction to news, leading to underprovisioning, excessive lending and risk-taking in reaction to good news, and the opposite in reaction to bad news. Due to timely loan loss provisioning under CECL, the optimal capital constraint is time-varying in response to the macroeconomic conditions and the underlying risk in the economy. In contrast to rational expectations, the representativeness heuristic necessitates a binding capital constraint even when bank equity is high and the social cost of bank failure is low.
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538 $a Mode of access: World Wide Web
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653 $a Capital requirements
653 $a Current expected credit losses
653 $a Loan loss provisions
653 $a Macroeconomic forecasts
653 $a Bank failure
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