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The procyclicality of banking: evidence from the euro area

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  • Huizinga, Harry
  • Laeven, Luc

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 of 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. JEL Classification: G20

Suggested Citation

  • Huizinga, Harry & Laeven, Luc, 2019. "The procyclicality of banking: evidence from the euro area," Working Paper Series 2288, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20192288
    Note: 261593
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    References listed on IDEAS

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    Cited by:

    1. Selim Elekdag & Sheheryar Malik & Srobona Mitra, 2019. "Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability," IMF Working Papers 19/254, International Monetary Fund.
    2. Melanie Klein, 2020. "Implications of negative interest rates for the net interest margin and lending of euro area banks," BIS Working Papers 848, Bank for International Settlements.
    3. Morais, Bernardo & Ormazabal, Gaizka & Peydro, J.L. & Roa, Monica & Sarmiento Paipilla, Miguel, 2020. "Forward Looking Loan Provisions : Credit Supply and Risk-Taking," Other publications TiSEM fe99a48f-f94a-41d8-bf3f-3, Tilburg University, School of Economics and Management.
    4. Elekdag, Selim & Malik, Sheheryar & Mitra, Srobona, 2020. "Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability," Journal of Banking & Finance, Elsevier, vol. 120(C).
    5. Zheng, Yi, 2020. "Does bank opacity affect lending?," Journal of Banking & Finance, Elsevier, vol. 119(C).
    6. Klein, Melanie, 2020. "Implications of negative interest rates for the net interest margin and lending of euro area banks," Discussion Papers 10/2020, Deutsche Bundesbank.
    7. Piotr J Szpunar, 2020. "How to benefit from financial deepening while preserving financial and macroeconomic stability: the case of Poland," BIS Papers chapters, in: Bank for International Settlements (ed.),Financial market development, monetary policy and financial stability in emerging market economies, volume 113, pages 243-254, Bank for International Settlements.

    More about this item

    Keywords

    accounting; bank capital; banks; financial regulation; financial stability; loan loss provisioning;

    JEL classification:

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

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