Factors Predicting the Allowance for Loan and Lease Losses at U.S. Commercial Banks: 2013-2015
Date of Award
Doctor of Business Administration (DBA)
Institution Granting Degree
Cedarville University School or Department
United States, commercial banking
As financial intermediaries, a key function of commercial banks is the granting of loans. Loans made by banks contain credit risk, namely risk of default and loss. Key items on banks' financial statements with respect to their loan portfolios are the Provision for Loan and Lease Losses (PLLL) and Allowance for Loan and Lease Losses (ALLL), on the income statement and balance sheet, respectively. A number of parties, including bank regulators, bank managers, and investors in U.S. commercial banks are interested in PLLL expense and ALLL levels, as these accounts directly impact bank earnings and overall bank safety and soundness. This dissertation examines what loan credit risk factors and general bank characteristics predict the level of the Allowance for Loan and Lease Losses (ALLL) in U.S. commercial banks for the three years of 2013 to 2015. Theory undergirding this study include diversification, risk/return, agency, and information asymmetry. Loan portfolio composition and diversification, loan quality and loan growth metrics are statistically significant predictors of the ALLL for U. S. commercial banks during the 2013 - 2015 period. Bank leverage and ownership are consistently statistically significant predictors as well. In general, statistical results are consistent with what theory predicts. This work also examines the economic significance of the empirical results. To measure the economic impact of each of the predictor variables, a basic sensitivity analysis is performed. In most cases, changes in the predictor variable have a modest economic impact on ALLL levels and bank profitability. However, bank ownership (public or private) demonstrates an economically meaningful difference in ALLL levels and bank profitability.
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Guernsey, Jeffrey S., "Factors Predicting the Allowance for Loan and Lease Losses at U.S. Commercial Banks: 2013-2015" (2017). Faculty Dissertations. 131.