Only recently the debate on bank capital regulation has devoted specific attention to the role that bank loan loss provisions can play as a part of the overall capital regulatory framework. This paper contributes to the ongoing debate by demonstrating empirically that loan loss provisioning needs to be an integral component of capital regulation. We find empirical evidence that many banks around the world delay provisioning for bad loans until too late, when cyclical downturns have already set in, thereby magnifying the impact of the economic cycle on banks' income and capital.

In countries with more secure property rights, firms might allocate resources better and consequentially grow faster as the returns on different types of assets are more protected against competitors' actions. Using data on sectoral value added for a large number of countries, we find evidence consistent with better property rights leading to higher growth through improved asset allocation. Quantitatively, the growth effect is as large as that of improved access to financing due to greater financial development. Our results are robust using various samples and specifications, including controlling for growth opportunities.