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The Determinants of Loan Loss Provisions: An Analysis of the Greek Banking System in Light of the Sovereign Debt Crisis

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  • Platon Monokroussos
  • Dimitrios D. Thomakos
  • Thomas A. Alexopoulos

Abstract

We utilize a new set of macroeconomic and regulatory data to analyze the evolution of loan loss provisioning practices in the Greek banking system over the period 2005-2015. We explore the determinants of the aggregate loan loss reserves to total loans ratio, which reflects the accumulation of provisions net of write-offs, and constitutes an important metric of the credit quality of loan portfolios. Our results suggest that domestic credit institutions respond relatively quickly to macroeconomic shocks, though the latter’s effects on the provisioning behavior of the domestic banking system show significant persistence. Furthermore, the impact of macroeconomic shocks on the loan loss reserves ratio has become stronger (both in terms of magnitude and statistical significance) following the outbreak of the Greek sovereign debt crisis. From a macro policy perspective, this result indicates that a sustainable stabilization of macroeconomic conditions is a key precondition for safeguarding domestic financial stability. For a regulatory standpoint, it suggests that the possibility of macroeconomic regime-related effects on banks’ provisioning policies should be taken into account when macro prudential stress tests of the banking system are designed and implemented.

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  • Platon Monokroussos & Dimitrios D. Thomakos & Thomas A. Alexopoulos, 2016. "The Determinants of Loan Loss Provisions: An Analysis of the Greek Banking System in Light of the Sovereign Debt Crisis," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 104, Hellenic Observatory, LSE.
  • Handle: RePEc:hel:greese:104
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    1. Hatgioannides, John & Karanassou, Marika & Sala, Hector & Karanasos, Menelaos G. & Koutroumpis, Panagiotis, 2017. "The legacy of a fractured Eurozone: the Greek Dra(ch)ma," LSE Research Online Documents on Economics 84542, London School of Economics and Political Science, LSE Library.
    2. Jordaan, Jacob A. & Monastiriotis, Vassilis, 2016. "The domestic productivity effects of FDI in Greece: loca(lisa)tion matters!," LSE Research Online Documents on Economics 68816, London School of Economics and Political Science, LSE Library.
    3. Kougias, Konstantinos, 2017. "‘Real’ flexicurity worlds in action: evidence from Denmark and Greece," LSE Research Online Documents on Economics 69576, London School of Economics and Political Science, LSE Library.
    4. Konstantinos Kougias, 2017. "‘Real’ Flexicurity Worlds in action: Evidence from Denmark and Greece," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 106, Hellenic Observatory, LSE.

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    • G3 - Financial Economics - - Corporate Finance and Governance

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