BANK-SPECIFIC DETERMINANTS OF SENSITIVITY OF LOAN-LOSS PROVISIONS TO BUSINESS CYCLE

Małgorzata Olszak, Iwona Kowalska (), Patrycja Chodnicka-Jaworska () and Filip Switala ()
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Iwona Kowalska: Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland
Patrycja Chodnicka-Jaworska: Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland
Filip Switala: Chair of Market Economy, Faculty of Management, University of Warsaw

No 32016, Faculty of Management Working Paper Series from University of Warsaw, Faculty of Management

Abstract: In this paper we explore several new factors which may affect the procyclicality of loan-loss provisions. In particular, we test whether there are visible differences in sensitivity of loan-loss provisions to the business cycle between commercial and cooperative banks as well as between large, medium and small banks. We also aim to find out whether the level of bank capital ratio and the application of discretionary income-smoothing affect procyclicality of loan-loss provisions. Our results show that loan-loss provisions of banks are procyclical. This procyclicality is particularly visible and stronger in the sample of commercial banks. We also find that loan-loss provisions of large banks are more negatively affected by the business cycle than those of medium or small banks. We show that banks with low capital ratios exhibit increased procyclicality of loan-loss provisions. And finally, we also find empirical evidence that banks with a greater degree of discretionary income-smoothi

Keywords: loan-loss provisions; procyclicality; bank size; capital ratio; discretionary income-smoothing (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 M41 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2016-11
New Economics Papers: this item is included in nep-ban and nep-mac
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