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An information quality-based explanation for loan loss allowance inadequacy during the 2008 financial crisis

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  • Yang, Ling

Abstract

I study whether commercial banks' loan loss allowances were inadequate during the 2008 financial crisis because bank managers relied on low-quality information to estimate loan losses. To measure the quality of information collected on bank-held mortgages prior to the crisis, I create a bank exposure-to-mortgage fraud risk index (EFI) that captures overstatement of borrower income in mortgage applications. I find banks that originated more loans in high-risk neighborhoods had less adequate loan loss allowances during the crisis. My study is consistent with the hypothesis that fraudulent borrower information adversely affected banks’ loan loss provisioning.

Suggested Citation

  • Yang, Ling, 2022. "An information quality-based explanation for loan loss allowance inadequacy during the 2008 financial crisis," Journal of Accounting and Economics, Elsevier, vol. 73(1).
    • Handle: RePEc:eee:jaecon:v:73:y:2022:i:1:s0165410121000483
    DOI: 10.1016/j.jacceco.2021.101433
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    References listed on IDEAS

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    Cited by:

    1. Sehwa Kim & Seil Kim & Anya V. Kleymenova & Rongchen Li, 2023. "Current Expected Credit Losses (CECL) Standard and Banks' Information Production," Finance and Economics Discussion Series 2023-063, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Banks; Loan loss allowances; Information quality; Reporting transparency; Mortgage fraud; The 2008 financial crisis;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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