Accounting discretion, loan loss provisioning, and discipline of Banks' risk-taking

► We model two aspects of discretionary forward-looking loan loss provisioning by banks around the world. ► Provisioning tied to current period earnings reduces bank discipline. ► Provisioning tied to current period earnings increases observed risk-shifting behavior in banks. ► Provisioning tied to future changes in non-performing loans increases the discipline of banks. ► Provisioning tied to future changes in non-performing loans decreases observed risk-shifting behavior in banks.