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Loan loss provisions under regulatory pressure: public versus private banks in Tunisia

FENDRI ZOUARI, Nawel and NEIFAR, MALIKA (2020): Loan loss provisions under regulatory pressure: public versus private banks in Tunisia.

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We study the effect of capital regulation on bank’s loan loss provisions. Using hand collected data on 13 Tunisian banks during the period 2006-2016, we show that Tunisian banks discretionnary decrease loan loss provisions under regulatory pressure. When studying private banks and public banks, we find that they don’t respond to the same capital regulatory constraints. Private banks discretionary reduce provisions in reaction to an increase in capital requirements when they are under pressure to meet regulatory eligible capital. However, the provisioning behavior of public banks is influenced by its regulatory capital position: they take lower loan loss provisions to enhance capital positions through the year and higher levels of loans loss provisions when coming into the year with stronger capital positions. Our analyses indicate that Tunisian banks use discretionary capital management to appear to be better capitalized but their overall ability to absorb loan losses is reduced. Regulators must be aware of this association and are requested to further strengthen regulation in loan classification and provisioning.

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