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Macroprudential policy instruments and procyclicality of loan-loss provisions – cross-country evidence

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Olszak M., Roszkowska S., Kowalska I.

Faculty of Management Working Paper Series

2016

issue WPS 4/2016

1-52

We analyze the effectiveness of various macroprudential policy instruments in reducing the procyclicality of loan-loss provisions (LLPs) using individual bank information from over 65 countries and applying the two-step GMM Blundell-Bond (1998) approach with robust standard errors. Our research identifies several new facts. Firstly, borrower restrictions are definitely more effective in reducing the procyclicality of loan-loss provisions than other macroprudential policy instruments. This effect is supported in both unconsolidated and consolidated data and is robust to several robustness checks. Secondly, dynamic provisions, large exposure concentration limits and taxes on specific assets are effective in reducing the procyclicality of loan-loss provisions. And finally, we find that both loan-to-value caps and debt-to-income ratios, are especially effective in reducing the procyclicality of LLP of large banks. Off-balance-sheet restrictions, concentration limits and taxes are also effective in reducing the procyclicality of LLP of large banks. Dynamic provisions reduce the procyclicality of LLP independently of bank size.

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

88%

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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2 Faculty of Management Working Paper Series

2 Kowalska I.

2 Olszak M.

1 Chodnicka-Jaworska P.

1 Roszkowska S.

1 Świtała F.

2 2016

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Macroprudential policy instruments and procyclicality of loan-loss provisions – cross-country evidence

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