Policy uncertainty and loan loss provisions in the banking industry

Jeffrey Ng, Walid Saffar, Janus Jian Zhang*

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    35 Citations (Scopus)


    Policy uncertainty is an increasingly important issue in many economies. Extensive evidence indicates that higher policy uncertainty is associated with future negative macroeconomic and microeconomic conditions. In this paper, we examine how policy uncertainty affects banks’ accruals for loan losses. Consistent with banks signaling more expected loan losses, we document that in times of higher policy uncertainty, banks make more loan loss provisions. This positive association is more pronounced for banks that were previously less prudent in their risk-taking and loan loss reserving, indicating that less prudent banks are harmed more by loan losses in difficult times. We also show that higher attention paid to a banks’ financial reporting strengthens the role of loan loss provisions as a signal of expected loan losses. Overall, our paper offers insight into how, in the face of policy uncertainty, banks convey information about their loan portfolios to their stakeholders.
    Original languageEnglish
    Pages (from-to)726–777
    Number of pages52
    JournalReview of Accounting Studies
    Issue number2
    Early online date16 Jan 2020
    Publication statusPublished - Jun 2020

    User-Defined Keywords

    • Policy uncertainty
    • Accruals estimates
    • Banking
    • Loan loss provisions
    • Earnings management


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