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Loan loss provisions of European banks – does macroprudential tightening matter?

Author

Listed:
  • Malgorzata OLSZAK

    (Wydzial Zarzadzania, Uniwersytet Warszawski)

  • Christophe J. GODLEWSKI

    (LaRGE Research Center, Université de Strasbourg)

  • Sylwia ROSZKOWSKA

    (Uniwersytet Warszawski)

  • Dorota SKALA

    (WNEiZ, University of Szczecin)

Abstract

In this paper, we study the relation between macroprudential policy and loan loss provisioning policy of European banks between 1996-2019. We analyse both the level of loan loss provisions (LLP) and their use in income smoothing by banks. Overall, we demonstrate that macroprudential tightening actions are associated with changes in LLP policy. Banks decrease their LLP when macroprudential policies are tightened and this result is particularly strong under Basel III. Tightening has a changing effect on income smoothing, as in the pre-Basel III period income smoothing is exacerbated and under Basel III it is diminished. Links between LLP policy and macroprudential policy strongly depend on the category of tools that are being tightened. In particular, instruments relating to provisioning standards are associated with increased LLP, while lower LLP are observed when a tightening occurs in tools connected with taxes on financial institutions and activities. Last but not least, banks amend their LLP policy when a tightening of macroprudential tools is carried out as an activation of a new tool, but also when existing tools are amended.

Suggested Citation

  • Malgorzata OLSZAK & Christophe J. GODLEWSKI & Sylwia ROSZKOWSKA & Dorota SKALA, 2023. "Loan loss provisions of European banks – does macroprudential tightening matter?," Working Papers of LaRGE Research Center 2023-02, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    • Handle: RePEc:lar:wpaper:2023-02
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    References listed on IDEAS

    as
    1. Marton, Jan & Runesson, Emmeli, 2017. "The predictive ability of loan loss provisions in banks – Effects of accounting standards, enforcement and incentives," The British Accounting Review, Elsevier, vol. 49(2), pages 162-180.
    2. Agénor, Pierre-Richard & Pereira da Silva, Luiz, 2017. "Cyclically adjusted provisions and financial stability," Journal of Financial Stability, Elsevier, vol. 28(C), pages 143-162.
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    More about this item

    Keywords

    Macroprudential policy; loan loss provisions; income smoothing; policy tightening; EEA;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • 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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