Empirical Investigation on Loan Loss Provisions: Evidence from Hong Kong and Japan

The present study examines the determinants of loan loss provisions with the presence of earnings management and capital management by commercial banks in Hong Kong and Japan as a developed market for the period of 2004 to 2012. Besides the main objective, there are external factors as well as the internal factors investigated in determining the loan loss provisions. The empirical findings based on Fixed Effects (FE) with heteroscedasticity and autocorrelation found that the proxy of earnings management, earnings before tax and provisions is positively related to loan loss provisions. Surprisingly, the variable of capital management is found to be positively associated with LLP. Based on the empirical findings of GDP, the economic expansion does influence the decision of loan loss provision by following the normal pattern of business cycle and contributes to the procyclicality behaviour of loan loss provisions. With respect to the effect of bank specific factors on the loan loss provisions, it clearly indicates from the overall perspective of the results, the obvious factors that have contributed to loan loss provisioning practice are only the non-performing loan and return on assets. Meanwhile, the robustness check using Generalized Method of Moments (GMM) has basically generated the same results as Fixed Effects with heteroscedasticity and autocorrelation.