Banks' riskiness over the business cycle: a panel analysis on Italian intermediaries

Mario Quagliariello

Applied Financial Economics, 2007, vol. 17, issue 2, 119-138

Abstract: A comprehensive investigation is provided on the issue of the possible cyclical nature of banks' behaviour using a large panel of Italian intermediaries over the period 1985 to 2002. Estimating both static and dynamic models, the article investigates whether loan loss provisions and non-performing loans show a cyclical pattern. The econometric results confirm that business cycle affects banks' loan loss provisions and new bad debts. The impact of recessionary conditions is significant and long-lasting. Moreover, the empirical evidence provides some support for the income-smoothing hypothesis. The estimated relations may be employed to carry out stress tests to assess the effects of macroeconomic shocks on banks' balance sheets.

Date: 2007
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DOI: 10.1080/09603100500486501

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