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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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    Cited by:

    1. 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.
    2. 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.
    3. Oľga Pastiranová & Jiří Witzany, 2021. "Ifrs 9 And It´S Behaviour In The Cycle: The Evidence On The Eu Countries," FFA Working Papers 3.003, Prague University of Economics and Business, revised 02 May 2021.
    4. Malovaná Simona & Tesařová Žaneta, 2021. "What is the Sustainable Level of Banks’ Credit Losses and Provisions?," Review of Economic Perspectives, Sciendo, vol. 21(3), pages 235-258, September.
    5. 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).
    6. Yasser Tamsamani, 2021. "Covid-19 et déficit du développement : pour une réponse conjointe au Maroc," Working Papers hal-03103015, HAL.
    7. Malovaná Simona & Tesařová Žaneta, 2022. "Banks’ Credit Losses and Provisioning over the Business Cycle: Implications for IFRS," Review of Economic Perspectives, Sciendo, vol. 22(1), pages 53-74, March.
    8. Paola Morales & Daniel Osorio-Rodríguez & Juan S. Lemus-Esquivel & Miguel Sarmiento, 2021. "The internationalization of domestic banks and the credit channel of monetary policy," Borradores de Economia 1181, Banco de la Republica de Colombia.
    9. Ms. Srobona Mitra & Sheheryar Malik & Mr. Selim A Elekdag, 2019. "Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability," IMF Working Papers 2019/254, International Monetary Fund.
    10. Morales, Paola & Osorio, Daniel & Lemus, Juan S. & Sarmiento, Miguel, 2022. "The internationalization of domestic banks and the credit channel of monetary policy," Journal of Banking & Finance, Elsevier, vol. 135(C).
    11. Morales, Paola & Osorio, Daniel & Lemus, Juan S. & Sarmiento Paipilla, Miguel, 2021. "The Internationalization of Domestic Banks and the Credit Channel of Monetary Policy," Other publications TiSEM 51d7c0c0-bcf4-4031-9e45-e, Tilburg University, School of Economics and Management.
    12. Ghulame Rubbaniy & Ali Awais Khalid & Stathis Polyzos & Balqees Naser Almessabi, 2022. "Cyclicality of capital adequacy ratios in heterogeneous environment: A nonlinear panel smooth transition regression explanation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1960-1979, September.
    13. Pérez Rodríguez, Pablo, 2021. "Accounting and auditing of credit loss estimates: The hard and the soft," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 2(2).
    14. Zheng, Yi, 2020. "Does bank opacity affect lending?," Journal of Banking & Finance, Elsevier, vol. 119(C).
    15. Bernardo Morais & Gaizka Ormazabal & José-Luis Peydró & Mónica Roa & Miguel Sarmiento, 2020. "Forward Looking Loan Provisions: Credit Supply and Risk-taking," Working Papers 1199, Barcelona School of Economics.
    16. 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.
    17. Emil Ślązak & Magdalena Skwarzec, 2022. "The effects of IFRS 9 valuation model on cost of risk in commercial banks – the impact of COVID-19," Bank i Kredyt, Narodowy Bank Polski, vol. 53(1), pages 47-78.
    18. Y. Tamsamani, Yasser, 2021. "Covid-19 et déficit du développement : pour une réponse conjointe au Maroc [Covid-19 and development deficit: for a joint response in Morocco]," MPRA Paper 105219, University Library of Munich, Germany.
    19. Morales, Paola & Osorio, Daniel & Lemus, Juan S. & Sarmiento Paipilla, Miguel, 2021. "The Internationalization of Domestic Banks and the Credit Channel of Monetary Policy," Discussion Paper 2021-028, Tilburg University, Center for Economic Research.
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    More about this item

    Keywords

    accounting; bank capital; banks; financial regulation; financial stability; loan loss provisioning;
    All these keywords.

    JEL classification:

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

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