Loan loss provisions of European banks – does macroprudential tightening matter?

Malgorzata Olszak (), Christophe Godlewski, Sylwia Roszkowska () and Dorota Skała
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Malgorzata Olszak: Wydzial Zarzadzania, Uniwersytet Warszawski
Sylwia Roszkowska: Uniwersytet Warszawski

Working Papers of LaRGE Research Center from Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg

Abstract: In this paper, we study the relation between macroprudential policy and loan loss provisioning policy of European banks between 1996-2019. We analyse both the level of loan loss provisions (LLP) and their use in income smoothing by banks. Overall, we demonstrate that macroprudential tightening actions are associated with changes in LLP policy. Banks decrease their LLP when macroprudential policies are tightened and this result is particularly strong under Basel III. Tightening has a changing effect on income smoothing, as in the pre-Basel III period income smoothing is exacerbated and under Basel III it is diminished. Links between LLP policy and macroprudential policy strongly depend on the category of tools that are being tightened. In particular, instruments relating to provisioning standards are associated with increased LLP, while lower LLP are observed when a tightening occurs in tools connected with taxes on financial institutions and activities. Last but not least, banks amend their LLP policy when a tightening of macroprudential tools is carried out as an activation of a new tool, but also when existing tools are amended.

Keywords: Macroprudential policy; loan loss provisions; income smoothing; policy tightening; EEA (search for similar items in EconPapers)
JEL-codes: E44 E58 G21 G28 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mon
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http://ifs.u-strasbg.fr/large/publications/2023/2023-02.pdf (application/pdf)

Related works:
Journal Article: Loan loss provisions of European banks – Does macroprudential tightening matter? (2025)
Working Paper: Loan loss provisions of European banks – Does macroprudential tightening matter? (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:lar:wpaper:2023-02

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