Investigating Factors Affecting Loan Loss Reserves in the US Financial Sector: A Dynamic Panel Regression Analysis with Fixed-Effects Models

Loan loss reserve accounts are an important part of banks’ ability to sustain losses. However, to enhance such protection, executives in the banking sector should recognize the factors that can affect the management of loan loss reserves. This study sought to investigate a novel set of macroeconomic and non-macroeconomic factors that can have an impact on the LLR ratios of banks in the United States (US). Data were retrieved from the Federal Reserve Economic Data (FRED) database, considering the population of the banks in the US for the fiscal years 2015 to 2023. Dynamic panel regression methods, including ordinary least squares (OLS), fixed-effects models (FEMs), and random-effects models (REMs), were used to reach the research goal. The results demonstrate that both macroeconomic and non-macroeconomic factors significantly influence the behavior of LLRs in the United States. We clearly recognized industrial production as the macroeconomic indicator with the highest influence on LLRs, accurately representing the sector’s activity level through its calculation. The research findings demonstrate that industrial production is crucial in banks’ strategies regarding LLRs. Further, the S&P 500 has the most substantial impact on LLRs in a non-macroeconomic framework. Also, the results indicate that US banks are seeing a resurgence and are proactively allocating resources for their recovery. Overall, the findings of the study suggest that the financial institutions of the US ought to enhance their loan provisioning strategies in order to optimize resource allocation and improve the overall business performance.