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DETERMINANTS OF LEVERAGE AND LIQUIDITY AND BANK SIZE – CROSS-COUNTRY STUDY

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Olszak M., Kowalska I.

Bezpieczny Bank

2016

issue 4 (65)

27-59

This paper aims to identify the role of bank size for the sensitivity of leverage and liquidity funding risk to their determinants (both bank-specific and macroeconomic). Applying the two-step robust GMM estimator to individual bank data from over 60 countries covering the period 2000–2011 our study shows that increases in previous period funding liquidity risk are associated with increases in leverage in the full sample and in large banks, but not in other banks. The liquidity of large banks tends also to increase with leverage levels. With reference to the impact of macroeconomic conditions on leverage of banks we find that leverage of large banks is the most procyclical during a crisis period. Liquidity risk is procyclical during non-crisis periods. However, during a crisis period this liquidity risk is countercyclical, consistent with the view that even slight improvements in macroeconomic environment do not stimulate banks to increase their exposure to this risk. Such effect is particularly strong in the case of large banks. Generally, such counter-cyclicality of liquidity risk of large banks may result in weaker access to the bank financing necessary to stimulate investments in the real economy during a crisis period. This may have further negative consequences for the real economy, generating an extended period of sluggish economic growth.

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

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Olszak M., Chodnicka-Jaworska P., Kowalska I., Świtała F.

Faculty of Management Working Paper Series

2016

issue WPS 3/2016

1-43

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.

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1 Bezpieczny Bank

1 Faculty of Management Working Paper Series

2 Kowalska I.

2 Olszak M.

1 Chodnicka-Jaworska P.

1 Świtała F.

2 2016

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DETERMINANTS OF LEVERAGE AND LIQUIDITY AND BANK SIZE – CROSS-COUNTRY STUDY

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