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Banks' Procyclical Behavior: Does Provisioning Matter?

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  • Vincent Bouvatier

    ()
    (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense)

  • Laetitia Lepetit

    ()
    (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)

Abstract

A panel of 186 European banks is used for the period 1992-2004 to determine if banking behaviors, induced by the capital adequacy constraint and the provisioning system, amplify credit fluctuations. Our nding is consistent with the bank capital channel hypothesis, which means that poorly capitalized banks constrained to expand credit. We also find that loan loss provisions (LLP) made in order to cover identified credit losses (non discretionary LLP) amplify credit fluctuations. Indeed, non discretionary LLP evolve cyclically. This leads to misevaluation of expected credit risk which affect banks'incentives grant new loans since lending costs are misstated. By contrast, LLP used for management objectives discretionary LLP) do not affect credit fluctuations. The findings of our research are consistent with the call for the implementation of a dynamic provisioning system in Europe.

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Paper provided by HAL in its series Post-Print with number hal-00916599.

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Date of creation: 2008
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Publication status: Published, Journal of International Financial Markets, Institutions & Money, 2008, 18, 5, 513-526
Handle: RePEc:hal:journl:hal-00916599

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Cited by:
  1. Marina Balboa & Germán López-Espinosa & Antonio Rubia, 2012. "Non-linear Dynamics in Discretionary Accruals: An Analysis of Bank Loan-Loss Provisions," Faculty Working Papers, School of Economics and Business Administration, University of Navarra 06/12, School of Economics and Business Administration, University of Navarra.
  2. Sarawan Angklomkliew & Jason George & Frank Packer, 2009. "Issues and developments in loan loss provisioning: the case of Asia," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, December.
  3. Müller, Oliver & Uhde, André, 2013. "Cross-border bank lending: Empirical evidence on new determinants from OECD banking markets," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 23(C), pages 136-162.
  4. Jan FRAIT & Zlatuše KOMÁRKOVÁ, 2013. "Loan Loss Provisioning in Selected European Banking Sectors: Do Banks Really Behave in a Procyclical Way?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 63(4), pages 308-326, August.
  5. Eliana Balla & Andrew McKenna, 2009. "Dynamic provisioning: a countercyclical tool for loan loss reserves," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Fall, pages 383-418.
  6. Phil Molyneux & Hong Liu & John O.S. Wilson, 2010. "Competition and Stability in European Banking: A Regional Analysis," Working Papers 10019, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  7. Chitan Gheorghe, 2013. "Is Adequate The Method Of Loan Loss Provisioning? - Evidence From Romania," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 1062-1069, July.
  8. Bolt, Wilko & de Haan, Leo & Hoeberichts, Marco & van Oordt, Maarten R.C. & Swank, Job, 2012. "Bank profitability during recessions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(9), pages 2552-2564.
  9. Coffinet, Jérôme & Coudert, Virginie & Pop, Adrian & Pouvelle, Cyril, 2012. "Two-way interplays between capital buffers and credit growth: Evidence from French banks," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 22(5), pages 1110-1125.
  10. John Bonin & Marko Kosak, 2013. "Loan/Loss Provisioning in Emerging Europe: Precautionary or Pro-Cyclical?," Wesleyan Economics Working Papers, Wesleyan University, Department of Economics 2013-010, Wesleyan University, Department of Economics.
  11. Olszak, Małgorzata & Pipień, Mateusz & Kowalska, Iwona & Roszkowska, Sylwia, 2014. "What drives heterogeneity of loan loss provisions’ procyclicality in the EU?," MPRA Paper 56834, University Library of Munich, Germany.
  12. Balboa, Marina & López-Espinosa, Germán & Rubia, Antonio, 2013. "Nonlinear dynamics in discretionary accruals: An analysis of bank loan-loss provisions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(12), pages 5186-5207.
  13. Wahyoe Soedarmono & Amine Tarazi, 2014. "Market structure, financial intermediation and riskiness of banks:Evidence from Asia Pacific," Working Papers hal-00947575, HAL.
  14. Olszak, Małgorzata & Pipień, Mateusz, 2013. "Cross Country Linkages as Determinants of Procyclicality of Loan Loss Provisions – Empirical Importance of SURE Specification," MPRA Paper 53784, University Library of Munich, Germany.

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