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Income smoothing through loan loss provisions in south and Eastern European banks

Author

Listed:
  • Albulena Shala

    (University of Prishtina “Hasan Prishtina”, Faculty of Economics, 10000 Prishtine, The Republic of Kosovo)

  • Valentin Toçi

    (University of Prishtina “Hasan Prishtina”, Faculty of Economics, 10000 Prishtine, The Republic of Kosovo)

  • Skender Ahmeti

    (University of Prishtina “Hasan Prishtina”, Faculty of Economics, 10000 Prishtine, The Republic of Kosovo)

Abstract

This study provides empirical evidence on income smoothing from the banking sector in nine South-Eastern Europe (SEE) countries for the period 2005-2014 by applying a number of methodological approaches. First, by using a sample of 321 banks this paper confirms our first hypothesis that banks in the SEE region use loan loss provisions (LLPs) to smooth their incomes. Second, by dividing the loan loss provision into its two components (discretionary and non-discretionary,) the study provides new evidence on the effects of loan loss provisions components on growth in bank lending. The results clearly prove our second hypothesis that the components of LLPs do matter on growth in bank lending. Third, this paper estimates the use of loan loss provisions for capital management by banks. The empirical results do not support the hypothesis of capital management for SEE banks. The novelty of this paper, unlike other works, is the inclusion of SEE countries.

Suggested Citation

  • 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.
    • Handle: RePEc:rfe:zbefri:v:38:y:2020:i:2:p:429-452
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    loan loss provisioning; South and Eastern European banks; income smoothing; capital management hypothesis; discretionary component; non-discretionary component;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

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