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The Procyclicality of Banking: Evidence from the Euro Area

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  • Harry Huizinga

    (Tilburg University and CEPR)

  • Luc Laeven

    (European Central Bank and CEPR)

Abstract

Loan loss provisions in the euro area are negatively related to GDP growth, i.e., they are procyclical. Loan loss provisions tend to be more procyclical at larger and better capitalized banks. The procyclicality of loan loss provisions can explain about two-thirds of the variation in bank capitalization over the business cycle. We estimate that provisioning procyclicality in the euro area is about twice as large as in other advanced economies. This difference reflects a larger procyclicality of provisioning in euro area countries already prior to euro adoption and the divergent growth experiences of euro area countries following the global financial crisis.

Suggested Citation

  • Harry Huizinga & Luc Laeven, 2019. "The Procyclicality of Banking: Evidence from the Euro Area," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(3), pages 496-527, September.
    • Handle: RePEc:pal:imfecr:v:67:y:2019:i:3:d:10.1057_s41308-019-00081-5
    DOI: 10.1057/s41308-019-00081-5
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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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