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Article
Does uncertainty matter for loan charge-offs?
Journal of International Financial Markets, Institutions & Money (2012)
  • Laetitia Lepetit
  • Frank Strobel, University of Birmingham
  • David G Dickinson, University of Birmingham
Abstract

Using a stylized real options model, we show that discretion over the timing of charging off a non-performing loan could be economically justified when collateral values are uncertain and there is a chance of loan recovery. The implied hypothesis of an "uncertainty dependence" aspect in loan charge-offs is empirically tested and validated using a panel of European banks. A welfare-maximizing regulator might want to let banks pursue such discretionary loan charge-off behavior, with the problem of distinguishing it from alternative capital management and income smoothing objectives, while transparency-seeking accounting standards setters would presumably not.

Keywords
  • discretion; loan charge-off; uncertainty dependence; real option
Disciplines
Publication Date
2012
Citation Information
Laetitia Lepetit, Frank Strobel and David G Dickinson. "Does uncertainty matter for loan charge-offs?" Journal of International Financial Markets, Institutions & Money Vol. 22 Iss. 2 (2012)
Available at: http://works.bepress.com/frank_strobel/6/