Laura de Natale Salvagnin
Master's – Loan loss provisions: risk exposure and goal biases in brazilian banks
Advisor: Prof. Dr. Bruno Meirelles Salotti
Comission: Profs. Drs. Eduardo da Silva Flores, Fernando Caio Galdi and Fernando Chiqueto
Link YouTube: https://youtu.be/dGSlfl7Wecc
This research aimed to identify in Brazilian banks, the influence factors related to the recognition of Loan Loss Provisions (LLP). The proper estimation of this loss is essential to ensure each financial institution solvency and, hence, the entire financial system stability. On the other hand, the significant discretionary component makes this accounting record susceptible to opportunistic goals beyond its essential role. The influence factors related to LLP already identified in previous researches and tested here were (i) the credit portfolio features - representing the essential purpose of the LLP reflecting the credit risk exposure -, (ii) capital requirement; (iii) macroeconomic environment; and (iv) market expectations - the last three factors representing goal biases. The quantitative methods and variables choices that could adequately represent the related factors were based on models already adopted in previous studies and also on available information filed in public repositories held by the Central Bank of Brazil (BCB) and the Brazilian Institute of Geography and Statistics (IBGE). The main sample contains 6,305 bank-observations from 148 financial institutions with the characteristic of financial intermediary, for the period 2001-2019. A modified model used by Bikker and Metzemakers (2005) were applied, in order to identify influence factors on LLP, and secondary models were developed, emphasizing on an adaptation of the model used by Clair (1992) to identify one of the characteristics of the credit portfolio, which deals with its deterioration. The models applied to the sample in this study showed that, in the Brazilian banking sector, LLP has a stronger tendency to goal bias, especially to earnings management, than to properly reflect exposure to credit risk - it’s essential function - and there is evidence that this trend occurs since the categorization of customers and operations. In general, the results corroborate the predictions (i) by Cavallo and Majnoni (2002) about the agency problems in provisioning practices, due to the significant discretion granted to banks to choose their criteria and internal methods applied to provisioning, and (ii) by Bikker and Metzemakers (2005) about LLP serving for transitional objectives and interests other than the essential purpose of portray credit risk exposure.
*Abstract provided by the author