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Loan loss provisions and the deposit rates yield curve at US banks

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  • Prateek Sharma

    (University of South Carolina)

Abstract

This paper examines the effect of Loan Loss Provisions (LLP’s) on US banks’ deposit rates yield curve. I find that the level of deposit rates on large, partially insured time deposits (CDs) increase with LLPs, the slope gets steeper, and the curvature of the yield curve increases. These effects are particularly pronounced for non-discretionary provisions. Furthermore, increased provisioning by banks that experience high loan growth and are profitable increases these effects, while banks that are conservative in accounting for their loan charge offs experience muted effects. In addition, non-discretionary provisions that contribute to economic capital (in excess of Tier 2 regulatory capital) mitigate these effects, while discretionary provisions have no effect. These findings provide evidence for depositor discipline and risk shifting behavior by depositors.

Suggested Citation

  • Prateek Sharma, 2024. "Loan loss provisions and the deposit rates yield curve at US banks," SN Business & Economics, Springer, vol. 4(8), pages 1-24, August.
    • Handle: RePEc:spr:snbeco:v:4:y:2024:i:8:d:10.1007_s43546-024-00631-8
    DOI: 10.1007/s43546-024-00631-8
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    More about this item

    Keywords

    Deposit rates; Loan loss provisions; Yield curve; Financial reporting; Banks;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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