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Loan Loss Provisioning in Selected European Banking Sectors: Do Banks Really Behave in a Procyclical Way?

This paper sets out to discuss the extent of procyclicality in European banks’ lending behavior and how much the regulatory and accounting framework may contribute to it. The main focus is the behavior of banks regarding provisioning against impaired financial assets. It also discusses whether a through-the-cycle provisioning regime could serve as one of the possible regulatory responses to the ongoing financial crisis. Our applied analysis reveals that European banks are among those that provision in a procyclical manner. On the theoretical level, therefore, through-the-cycle provisioning could be helpful in creating a buffer during good times which could then be used during recessions. On the practical level, however, through-the-cycle provisioning would for numerous reasons be difficult to introduce soon and would first need to be aligned with the other components of the international framework for accounting and for the regulation of financial institutions.

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Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 63 (2013)
Issue (Month): 4 (August)
Pages: 308-326

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Handle: RePEc:fau:fauart:v:63:y:2013:i:4:p:308-326
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  1. Gabriel Jiménez & Steven Ongena & José-Luis Peydró & Jesús Saurina, 2012. "Macroprudential policy, countercyclical bank capital buffers and credit supply: Evidence from the Spanish dynamic provisioning experiments," Economics Working Papers 1315, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2013.
  2. Laeven, Luc & Majnoni, Giovanni, 2001. "Loan loss provisioning and economic slowdowns : too much, too late?," Policy Research Working Paper Series 2749, The World Bank.
  3. 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, December.
  4. Frank Packer & Haibin Zhu, 2012. "Loan loss provisioning practices of Asian banks," BIS Working Papers 375, Bank for International Settlements.
  5. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  6. Vincent Bouvatier & Laetitia Lepetit, 2008. "Banks' Procyclical Behavior: Does Provisioning Matter?," Post-Print hal-00916599, HAL.
  7. Jan Frait & Zlatuse Komarkova, 2011. "Financial Stability, Systemic Risk and Macroprudential Policy," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2010/2011, chapter 0, pages 96-111 Czech National Bank, Research Department.
  8. Jacob A. Bikker & Paul A.J. Metzemakers, 2003. "Bank Provisioning Behaviour and Procyclicality," DNB Staff Reports (discontinued) 111, Netherlands Central Bank.
  9. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
  10. Fudenberg, Drew & Tirole, Jean, 1994. "A Theory of Income and Dividend Smoothing Based on Incumbency Rents," IDEI Working Papers 34, Institut d'Économie Industrielle (IDEI), Toulouse.
  11. Jan Frait & Zlatuse Komarkova, 2012. "Macroprudential Policy and Its Instruments in a Small EU Economy," Research and Policy Notes 2012/03, Czech National Bank, Research Department.
  12. Jan Frait & Luboš Komárek & Zlatuše Komárková, 2011. "Monetary Policy in a Small Economy after Tsunami: A New Consensus on the Horizon?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(1), pages 5-33, January.
  13. Vincent Bouvatier & Laetitia Lepetit, 2006. "Banks'procyclicality behavior : does provisioning matter ?," Cahiers de la Maison des Sciences Economiques bla06035, Université Panthéon-Sorbonne (Paris 1).
  14. Kim, Daesik & Santomero, Anthony M., 1993. "Forecasting required loan loss reserves," Journal of Economics and Business, Elsevier, vol. 45(3-4), pages 315-329.
  15. International Monetary Fund, 2012. "Dynamic Loan Loss Provisioning; Simulationson Effectiveness and Guide to Implementation," IMF Working Papers 12/110, International Monetary Fund.
  16. Jan Frait & Zlatuse Komarkova, 2009. "Instruments for Curbing Fluctuations in Lending over the Business Cycle," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2008/2009, chapter 0, pages 72-81 Czech National Bank, Research Department.
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