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Bank loan loss provisions, investor protection and the macroeconomy

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  • Peterson K. Ozili

Abstract

Purpose - The purpose of this paper is to investigate the non-discretionary determinants of bank loan loss provisions in Africa after controlling for macroeconomic fluctuation, financial development and investor protection. Design/methodology/approach - The author uses static and dynamic regression estimation to test for the determinants of bank loan loss provisions. Findings - The author finds that non-performing loans (NPL), loan-to-asset ratio and loan growth are significant non-discretionary drivers of bank provisions in the African region. The author observes that bank provision is a positive function of NPL up to a threshold beyond which bank provisions will no longer increase as NPL increases. Also, bank loan-to-asset ratio is a significant driver of bank provisions when African banks have higher loan-to-asset ratios. The author finds that larger banks in financially developed African countries have fewer loan loss provisions while increase in bank lending leads to fewer bank provisions in countries with strong investor protection. Finally, higher bank lending is associated with higher bank provisions during economic boom. Originality/value - This study is the first to assess the determinants of non-discretionary bank provisions in Africa as part of micro-prudential surveillance of banks in the African region.

Suggested Citation

  • Peterson K. Ozili, 2018. "Bank loan loss provisions, investor protection and the macroeconomy," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 13(1), pages 45-65, January.
    • Handle: RePEc:eme:ijoemp:ijoem-12-2016-0327
    DOI: 10.1108/IJoEM-12-2016-0327
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    6. Peterson K. Ozili, 2017. "Discretionary provisioning practices among Western European banks," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 9(1), pages 109-118, April.
    7. Bouvatier, Vincent & Lepetit, Laetitia, 2008. "Banks' procyclical behavior: Does provisioning matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 513-526, December.
    8. Pool, Sebastiaan & de Haan, Leo & Jacobs, Jan P.A.M., 2015. "Loan loss provisioning, bank credit and the real economy," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 124-136.
    9. Vincent Bouvatier & Laetitia Lepetit, 2012. "Effects of Loan Loss Provisions on Growth in Bank Lending: Some International Comparisons," International Economics, CEPII research center, issue 132, pages 91-116.
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    14. Małgorzata Olszak & Mateusz Pipień & Iwona Kowalska & Sylwia Roszkowska, 2017. "What Drives Heterogeneity of Cyclicality of Loan-Loss Provisions in the EU?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(1), pages 55-96, February.
    15. Vincent Bouvatier & Laetitia Lepetit, 2012. "Effects of Loan Loss Provisions on Growth in Bank Lending: Some International Comparisons," International Economics, CEPII research center, issue 132, pages 91-116.
    16. Ozili, Peterson K, 2015. "Loan Loss Provisioning, Income Smoothing, Signaling, Capital Management and Procyclicality: Does IFRS Matter? Empirical Evidence from Nigeria," MPRA Paper 68350, University Library of Munich, Germany.
    17. Fonseca, Ana Rosa & González, Francisco, 2008. "Cross-country determinants of bank income smoothing by managing loan-loss provisions," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 217-228, February.
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    20. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57, Bank for International Settlements.
    21. Stergios Leventis & Panagiotis Dimitropoulos & Asokan Anandarajan, 2011. "Loan Loss Provisions, Earnings Management and Capital Management under IFRS: The Case of EU Commercial Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 40(1), pages 103-122, October.
    22. Darren Pain, 2003. "The provisioning experience of the major UK banks: a small panel investigation," Bank of England working papers 177, Bank of England.
    23. Andries, Kathleen & Gallemore, John & Jacob, Martin, 2017. "The effect of corporate taxation on bank transparency: Evidence from loan loss provisions," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 307-328.
    24. repec:cii:cepiei:2012-q4-132-3 is not listed on IDEAS
    25. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    26. Beaver, William H. & Engel, Ellen E., 1996. "Discretionary behavior with respect to allowances for loan losses and the behavior of security prices," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 177-206, October.
    27. Frank Packer & Haibin Zhu, 2012. "Loan loss provisioning practices of Asian banks," BIS Working Papers 375, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Ozili, Peterson K., 2019. "Bank income smoothing, institutions and corruption," Research in International Business and Finance, Elsevier, vol. 49(C), pages 82-99.
    2. Peterson K. Ozili, 2019. "Bank loan loss provisions, risk-taking and bank intangibles," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 9(1), pages 21-39.
    3. Karim Farag & Taha Kassem & Yasmine Ramzy, 2023. "The Crucial Macroeconomic and Microeconomic Determinants of Retail and Corporate Credit Risks," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 13(2), pages 30-41.
    4. Peterson K. Ozili, 2022. "Determinants of bank income smoothing using loan loss provisions in the United Kingdom," Journal of Economic and Administrative Sciences, Emerald Group Publishing Limited, vol. 40(3), pages 641-657, February.
    5. Peterson K. Ozili & Thankom G. Arun, 2023. "What drives bank income smoothing? Evidence from Africa," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 20(3), pages 274-295, September.
    6. Peterson K. Ozili, 2020. "Financial inclusion and business cycles," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 13(2), pages 180-199, August.
    7. Peterson K. Ozili, 2020. "Financial inclusion and business cycles," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 13(2), pages 180-199, August.
    8. Yosra Mnif & Imen Slimi, 2023. "Former auditors on the audit committee and earnings management: Evidence from African banks," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2383-2420, June.
    9. Albulena Shala & Valentin Toçi & Skender Ahmeti, 2020. "Income smoothing through loan loss provisions in south and Eastern European banks," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 38(2), pages 429-452.
    10. Peterson K. Ozili, 2019. "Bank loan loss provisioning during election years: cross-country evidence," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 16(4), pages 413-431, December.
    11. Zhang, Ying & Zhai, Ling & Sun, Haijia, 2019. "Does the level of financial leasing matter in the impact of bank lending on economic growth: Evidence from the global market (2006–2016)," Finance Research Letters, Elsevier, vol. 30(C), pages 352-359.
    12. Ozili, Peterson K, 2019. "Bank Earnings Management using Commission and Fee Income: the Role of Investor Protection and Economic Fluctuation," MPRA Paper 101824, University Library of Munich, Germany.

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    More about this item

    Keywords

    Africa; Banks/other depository institutions; Income smoothing; Investor protection; Macroeconomy; Loan loss provisions; Financial development; Economic cycle; C23; G21; G28; M41;
    All these keywords.

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • A11 - General Economics and Teaching - - General Economics - - - Role of Economics; Role of Economists
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F3 - International Economics - - International Finance
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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