Bank-specific determinants of sensitivity of loan-loss provisions to business cycle

• Authors: Olszak Małgorzata , Chodnicka-Jaworska Patrycja , Kowalska Iwona , Świtała Filip
• Languages of publication: EN

Abstracts

EN

In this paper we explore several new factors which may affect the procyclicality of loan-loss provisions. In particular, we test whether there are visible differences in sensitivity of loan-loss provisions to the business cycle between commercial and cooperative banks as well as between large, medium and small banks. We also aim to find out whether the level of bank capital ratio and the application of discretionary income-smoothing affect procyclicality of loan-loss provisions. Our results show that loan-loss provisions of banks are procyclical. This procyclicality is particularly visible and stronger in the sample of commercial banks. We also find that loan-loss provisions of large banks are more negatively affected by the business cycle than those of medium or small banks. We show that banks with low capital ratios exhibit increased procyclicality of loan-loss provisions. And finally, we also find empirical evidence that banks with a greater degree of discretionary income-smoothing have loan-loss provisions more negatively affected by the business cycle, and thus more procyclical.

Keywords

EN

loan-loss provisions; procyclicality; bank size; capital ratio; discretionary income-smoothing

• Publisher: Uniwersytet Warszawski. Wydział Nauk Ekonomicznych
• Journal: Faculty of Management Working Paper Series
• Year: 2016
• Issue: WPS 3/2016
• Pages: 1-43

Dates

online

2016-10-08

Contributors

author

Olszak Małgorzata

• aDepartment of Banking and Money Markets, Faculty of Management, University of Warsaw

author

Chodnicka-Jaworska Patrycja

• bDepartment of Banking and Money Markets, Faculty of Management, University of Warsaw

author

Kowalska Iwona

• cDepartment of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw

author

Świtała Filip

• dChair of Market Economy, Faculty of Management, University of Warsaw

References

• Nichols, D. C., Wahlen, J. M., & Wieland, M. W. (2009). Publicly-traded versus privately held: implications for conditional conservatism in bank accounting. Review of Accounting Studies, 14, 88-122. 10.1007/s11142-008-9082-3
• Norden, L., & Stoian, A. (2013). Bank earnings management through loan-loss provisions: a double edged sword? Working Paper N0. 404, De Nederlandsche Bank NV http://www.dnb.nl/binaries/working%20Paper%20404_tcm46-301517.pdf
• Olszak, M., Pipień, M., Kowalska, I., & Roszkowska, S. (2016a). What drives heterogeneity of cyclicality of loan-loss provisions in the EU? Journal of Financial Services Research, DOI 10.1007/s10693-015-0238-6
• Olszak, M., Pipień, M., & Roszkowska, S. (2016b). The Impact of Capital Ratio on Lending of EU Banks – the Role of Bank Specialization and Capitalization. Equilibrium. Quarterly Journal of Economics and Economic Policy, 11(1), pp. 43-59, DOI: http://dx.doi.org/10.12775/ EQUIL.2016.002
• Peltzman, S. (1970). Capital Investment in Commercial Banking and Its Relationship to Portfolio Regulation. Journal of Political Economy, Vol. 78, No.1:1–26. Stable URL: http://www.jstor.org/stable/1829616
• Roodman, D. (2009). Practitioners Corner: A Note on the Theme of Too Many Instruments. Oxford Bulletin of Economics and Statistics, 71, 135-158.
• Roszkowska S., & Pipień M. (2015) Szacunki kwartalnego PKB według województw w Polsce – zastosowanie estymacji funkcji parametrów modelu regresji liniowej [Estimations of quarterly GDP in voivodeships in Poland – application of parameters of ordinary least squares regressions model]. Materiały i Studia nr 315. Narodowy Bank Polski [National Bank of Poland]. https://www.nbp.pl/publikacje/materialy_i_studia/ms315.pdf
• Schooner, H. M., & Taylor, M. W. (2010). Global Bank Regulation. Principles and Policies. Elsevier, Academic Press.
• Shrieves, R. E., & Dahl, D. (2003). Discretionary accounting and the behavior of Japanese banks under financial duress. Journal of Banking and Finance, 27, 1219-1243. http://dx.doi.org/10.1016/S0378-4266(02)00252-2
• Skała, D., (2015). Saving on a Rainy Day? Income Smoothing and Procyclicality of Loan-Loss Provisions in Central European Banks. International Finance http://dx.doi.org/10.1111/1468-2362.12058.
• Soedarmono, W., Tarazi, A., Agusman, A., Monroe, G. S., & Gasbarro, D. (2015). Loan Loss Provisions and Lending Behavior of Banks: Do Information Sharing and Borrower Legal Rights Matter? Working Papers. https://hal.archives-ouvertes.fr/hal-01284978/document
• Stiglitz, J. E. (2010). Freefall. America, Free Markets, and the Sinking of the World Economy. New York, Norton.
• Svitek, M. (2001). Functions of bank capital, BIATEC – bankový časopis, ročník 9, No. 5:37–40. http://www.nbs.sk/_img/Documents/BIATEC/svitekan.pdf
• Zilberman, R., &Tayler, W. (2015). Financial shocks, loan loss provisions and macroeconomic stability. Lancaster University Economics Working Paper Series 23(2015). https://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/FinancialShocks.pdf

Identifiers

ISSN

2300-4371