Bank loan loss provisioning during election years: cross-country evidence

Purpose - The purpose of this paper is to examine bank loan loss provisioning behavior during election years – focusing on the effect of elections on banking sector loan loss provisioning. Design/methodology/approach - Regression analysis was used to analyze the behavior of bank loan loss provisioning in developed countries during election years. Findings - The findings reveal that the banking sectors in developed countries have higher loan loss provisions (LLPs) in election years. Also, income smoothing is present in election years which supports the income smoothing hypothesis. Also, banking sectors with high capital levels have higher LLPs. Although, there were no significant differences in bank loan loss provisioning during election years across the four bloc, the EU banking sectors and the banking sectors of BIS member countries generally have higher LLPs while the non-EU banking sectors and the banking sectors of the G7 member countries generally have fewer LLPs. Originality/value - The literature has not explored the effect of political factors such as “election-year risk” on the managers’ discretion in banks. This is the first study that explores the effect of political change on managerial discretion in banks.