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Banks' riskiness over the business cycle: a panel analysis on Italian intermediaries

  • Mario Quagliariello

A comprehensive investigation is provided on the issue of the possible cyclical nature of banks' behaviour using a large panel of Italian intermediaries over the period 1985 to 2002. Estimating both static and dynamic models, the article investigates whether loan loss provisions and non-performing loans show a cyclical pattern. The econometric results confirm that business cycle affects banks' loan loss provisions and new bad debts. The impact of recessionary conditions is significant and long-lasting. Moreover, the empirical evidence provides some support for the income-smoothing hypothesis. The estimated relations may be employed to carry out stress tests to assess the effects of macroeconomic shocks on banks' balance sheets.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100500486501
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Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 17 (2007)
Issue (Month): 2 ()
Pages: 119-138

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Handle: RePEc:taf:apfiec:v:17:y:2007:i:2:p:119-138
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  1. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  2. Giancarlo Bruno & Edoardo Otranto, 2003. "Dating the Italian Business Cycle: A Comparison of Procedures," Econometrics 0312003, EconWPA.
  3. Laeven, Luc & Majnoni, Giovanni, 2001. "Loan loss provisioning and economic slowdowns : too much, too late?," Policy Research Working Paper Series 2749, The World Bank.
  4. Ahmed, Anwer S. & Takeda, Carolyn & Thomas, Shawn, 1999. "Bank loan loss provisions: a reexamination of capital management, earnings management and signaling effects," Journal of Accounting and Economics, Elsevier, vol. 28(1), pages 1-25, November.
  5. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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