Testing loan loss provisioning hypotheses for banks in China

Abstract

The purpose of this paper is to test four hypotheses which are related to bank loan loss provision: income smoothing, capital management, business cycle and bank efficiency. Data is collected for Chinese banks in 2011 to 2016, and Stochastic frontier analysis and Generalized method of moments are taken for analysis. The results support bank efficiency hypothesis in Chinese non state-owned banks, and indicate the countercyclicality of loan loss provision in both state-owned banks and non state-owned banks. However, there is no evidence for income-smoothing behaviour and capital management hypothesis