Governance, business model and size as drivers of loan’s portfolio management and provisioning in European banks

The quality of loan portfolios plays a critical role in ensuring the stability of banks, as its deterioration can contribute to financial crises. Therefore, it is essential to analyse the factors influencing not only the share of non-performing loans in bank portfolios but also the provisioning policies adopted to mitigate credit risk. This article aims to examine the determinants of loan portfolio quality in European banks, as well as the extent to which provisions cover these portfolios. Our research is based on a sample of 197 banks from 31 European countries and the period from 2011 to 2022. The study employs dynamic panel regression models with Generalised Method of Moments estimators. We employ a comprehensive framework for credit risk management, incorporating three fundamental indicators: non-performing loans, provision coverage, and the cost of risk. Our empirical findings suggest that diversifying income sources beyond traditional lending activities can improve the effectiveness of credit risk management. Furthermore, larger banks demonstrate superior capability in managing non-performing loans and mitigating risk-related costs. This effect is particularly pronounced in institutions with a strategic investor, suggesting a potential advantage in governance and risk oversight. These insights provide valuable guidance for policymakers and financial institutions in managing credit risk and ensuring financial stability.