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Deposit insurance and discretion in loan loss provisioning
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DOI：10.1016/j.jcorpfin.2026.102995.png)
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Abstract
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Deposit insurance (DI) incentivizes bank risk-taking and regulatory scrutiny. Through both mechanisms, it should affect bank accounting. This paper studies how a recent, substantial expansion in U.S. DI coverage impacts a key accounting policy: discretion in banks' loan loss provision (LLP). Relative to controls, affected banks post higher discretionary LLP, suggesting a capital-reducing or conservative bent. Results are strongest for those most exposed to the DI increase, those that increase risk most, and those subject to the most regulatory scrutiny. Our study is the first to show a direct impact of DI on bank accounting policy.
Keywords:
Deposit insurance
Loan loss provision
Bank risk-taking
Accounting policy
Regulatory scrutiny
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