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Cross country linkages as determinants of procyclicality of loan loss provisions – empirical importance of SURE specification

100%
Olszak M. ł., Pipień M.
Faculty of Management Working Paper Series
|
2013
|
issue WPS 2/2014
1-19
EN
Procyclicality in banking may result in financial instability and therefore be destructive to economic growth. The sensitivity of different banking balance sheet and income statement variables to the business cycle is diversified and may be prone to increasing integration of financial markets. In this paper we address the problem of the influence of financial integration on the transmission of economic shocks from one country to another and consequently on the sensitivity of loan loss provisions to the business cycle. We also aim to find out whether earnings management hypotheses are supported throughout the whole business cycle. Application of the SURE approach to 13 OECD countries in 1995-2009 shows that the procyclicality of LLP is statistically significant almost in thewhole sample of countries. Independent of the econometric specification, the earnings management hypotheses are hardly supported.
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What drives heterogeneity of procyclicality of loan loss provisions in the EU?

75%
Olszak O., Pipień M., Kowalska I., Roszkowska S.
Faculty of Management Working Paper Series
|
2014
|
issue WPS 3/2014
1-34
EN
Using the two step system GMM Blundell and Bond estimator this paper documents a large cross-bank and cross-country variation in the relationship between loan loss provisions (LLP) and the business cycle and explores bank management specific, bank-activity specific and country specific (institutional and regulatory) features that explain this diversity in the European Union. Our results indicate that LLP in large, publicly traded and commercial banks, as well as in banks reporting consolidated statements, are more procyclical. Better investor protection and more restrictive bank capital regulations reduce the procyclicality of LLP. We do not find support for the view that better quality of market monitoring mitigates the sensitivity of LLP to business cycle. Our findings clearly indicate the empirical importance of income smoothing, capital management and credit risk management for decreased procyclicality of LLP.
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