Loan loss provision, unsecured-collateralized loan choice and macro-stability in China

Lim, KY, Liu, C ORCID: https://orcid.org/0000-0003-3770-4821 and Tan, L, 2025. Loan loss provision, unsecured-collateralized loan choice and macro-stability in China. B.E. Journal of Macroeconomics. ISSN 1935-1690 (Forthcoming)

Text 2491217_Liu.pdf - Post-print Restricted to Repository staff only Download (453kB)

Abstract

We develop a novel dynamic stochastic general equilibrium model with loan-loss provisions (LLPs) and unsecured-collateralized loan choice, the latter being endogenously determined due to enterprises having heterogeneous production capacity. Further, due to the presence of a second source of production uncertainty, which is only observed ex-post to loan contracting, type-specific aggregate default rates are endogenously determined too, which results in a model economy whose cyclicality can be driven significantly by LLP adjustment shocks. We estimate the model using actual Chinese data from 2004Q4 to 2020Q4. Our estimated model is able to generate co-movement between LLPs and the unsecured-collateralized loan ratio, a feature of the Chinese banking system that is consistent with empirical evidence. We also find that banks' LLPs are countercyclical, despite the overall LLP regime still remaining relatively backwards-looking, indicating that the present Chinese banking regulations can be overly prudent.

Item Type:	Journal article
Publication Title:	B.E. Journal of Macroeconomics
Creators:	Lim, K.Y., Liu, C. and Tan, L.
Publisher:	De Gruyter
Date:	25 August 2025
ISSN:	1935-1690
Identifiers:	Number Type 2491217 Other
Divisions:	Schools > Nottingham Business School
Record created by:	Laura Borcherds
Date Added:	02 Sep 2025 08:01
Last Modified:	02 Sep 2025 08:01
URI:	https://irep.ntu.ac.uk/id/eprint/54271

Actions (login required)

Edit View

Statistics

Views

Downloads