An Analysis Of Managerial Discretion Behavior Based On Discretionary Loan Loss Provision

Loan loss provision includes non-discretionary loan loss provision and disc retionary loan loss provision.Non-discretionary loan loss provision is an objecti ve measure related to loan quality,which is estimated based on loan condition to cover possible losses.While discretionary loan loss provision is a reserve ba sed on other reasons,which represents the behavior of the managerial discretio n behavior in loan loss provision of Chinese commercial banks.Managers use loan loss provision to adjust capital adequacy ratio and earnings management,which is related to the discretionary loan loss provision.However,most study use the whole loan loss provision.This method will affect the accuracy of the conclusion.To solve this problem,we separate the discretionary loan loss provi sion from the whole loan loss provision and use the discretionary loan loss pr ovision as the proxy variable of managerial discretion to analyze the manageria 1 discretion behavior in loan loss provision of Chinese commercial banks.Drawing on the perspective of discretionary loan loss provision,we re-exa mine the behavior of manipulating capital adequacy and earnings management among bank managers.In particular,we collect data from the 16 listed comme rcial banks in China,which support most of our hypotheses.Specifically,the e mpirical results show that the relationship between discretionary loan loss provi sion and capital adequacy ratio is more significant because of the increasing of default cost.At the same time,compared with signal transmission,Chinese co mmercial Bank managers tend to use discretionary loan loss provision to earnin gs management.We also found that Chinese commercial bank managers will u se discretionary loan loss provision to mitigate the risk of bank level and finan cing pressure,which is conducive to the steady operation of commercial banks.this validates the positive effect of managerial discretion to some extent.In a ddition,the managers' subjective perception of the economic downturn prompts them to reduce the amount of discretionary loan loss provision,which mitigates the pro-cyclical feature of loan loss provision.Based on the above conclusion s,this paper suggests that the regulatory organizations should perfect the policy of loan loss provision of commercial banks,meanwhile considering carefully t he discretion and promoting the process of transparency.On the one hand,Chi na Commercial Bank should establish a scientific loan risk and loan loss estim ation system to estimate the loan risk with historical data,which is helpful to promote the transparency of discretionary loan loss provision;On the other han d,it is difficult for supervisors to avoid the use of discretionary power in the process of inspection,so we propose to improve the transparency of the regula tory process and establish a reasonable system of discretionary supervision.