Local governments' economic growth target pressure and bank loan loss provision: Evidence from China

This paper aims to investigate whether and how the top-down amplification of economic growth targets affects banks' loan loss provision (LLP). We find that banks in prefecture-level cities with higher economic growth target pressure (EGTP) will withdraw more LLPs, indicating that they will accrue reserves prospectively to deal with potential credit losses. We further find that EGTP reduces credit allocation efficiency and increases future loan losses, and banks' risk prevention motivation is the mechanism for accruing LLPs. It's also shown that fiscal pressure and promotion pressure will amplify EGTP's effect, while reduced government intervention will weaken banks' risk prevention motivation. Overall, our paper provides systematic evidence on how banks respond to the negative impact of EGTP through loan loss provisioning.

Automated summary

This paper investigates the impact of top-down amplification of economic growth targets on banks' loan loss provision. The findings indicate that banks in cities with higher economic growth target pressure will increase their LLPs in order to prepare for potential credit losses. The study also reveals that economic growth target pressure reduces credit allocation efficiency, increases future loan losses, and banks' risk prevention motivation is the mechanism behind accruing LLPs.