Economic Brief

March 2012, No. 12-03

Loan Loss Reserve Accounting and Bank Behavior

Eliana Balla, Morgan J. Rose and Jessie Romero

The rules governing banks' loan loss provisioning and reserves require a trade-off between the goals of bank regulators, who emphasize safety and soundness, and the goals of accounting standard setters, who emphasize the transparency of financial statements. A strengthening of accounting priorities in the decade prior to the financial crisis was associated with a decrease in the level of loan loss reserves in the banking system.

Additional Resources

Balla, Eliana and Morgan J. Rose, "Loan Loss Reserves, Accounting Constraints, and Bank Ownership Structure," Federal Reserve Bank of Richmond Working Paper No. 11-09, December 2011.

Bernanke, Ben S., "Financial Reform to Address Systemic Risk," Speech to the Council on Foreign Relations, Washington, D.C., March 10, 2009.

Laeven, Luc and Giovanni Majnoni, "Loan Loss Provisioning and Economic Slowdowns: Too Much, Too Late?" Journal of Financial Intermediation, April 2003, vol. 12, no. 2, pp. 178-197. (A working paper version is available online.)

Wall, Larry D. and Timothy W. Koch, "Bank Loan-Loss Accounting: A Review of Theoretical and Empirical Evidence," Federal Reserve Bank of Atlanta Economic Review, Second Quarter 2000, vol. 85, no. 2, pp. 1-19.

Walter, John A. "Loan Loss Reserves," Federal Reserve Bank of Richmond Economic Review, July/August 1991, vol. 77, no. 4, pp. 20-30.

Websitefor the FASB and IASB's Joint Project on Accounting for Financial Instruments — Credit Impairment

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