Bank provisioning behaviour and procyclicality
AbstractThe current debate on the possible procyclicality of the new Basel Accord pays little attention to the procyclicality created by unsound loan loss provisioning. This paper investigates how bank provisioning behaviour is related to the business cycle, using 8,000 bank-year observations from 29 OECD countries over the past decade. Provisioning turns out to be substantially higher when GDP growth is lower, reflecting increased riskiness of the credit portfolio when the business cycle turns downwards, which also increases the risk of a credit crunch. This effect is mitigated somewhat as provisions rise in times when earnings are higher, suggesting income smoothing, and loan growth is higher, indicating increased riskiness.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Directorate Supervision in its series Research Series Supervision (discontinued) with number 50.
Date of creation: Oct 2002
Date of revision:
banks; loan loss provisioning; lending; credit crunch; business cycle; procyclicality; income smoothing; capital management;
Other versions of this item:
- Bikker, J.A. & Metzemakers, P.A.J., 2005. "Bank provisioning behaviour and procyclicality," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(2), pages 141-157, April.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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