Bank provisioning behaviour and procyclicality

Jacob Bikker () and Paul Metzemakers ()

Research Series Supervision (discontinued) from Netherlands Central Bank, Directorate Supervision

Abstract: The current debate on the possible procyclicality of the new Basel Accord pays little attention to the procyclicality created by unsound loan loss provisioning. This paper investigates how bank provisioning behaviour is related to the business cycle, using 8,000 bank-year observations from 29 OECD countries over the past decade. Provisioning turns out to be substantially higher when GDP growth is lower, reflecting increased riskiness of the credit portfolio when the business cycle turns downwards, which also increases the risk of a credit crunch. This effect is mitigated somewhat as provisions rise in times when earnings are higher, suggesting income smoothing, and loan growth is higher, indicating increased riskiness.

Keywords: banks; loan loss provisioning; lending; credit crunch; business cycle; procyclicality; income smoothing; capital management (search for similar items in EconPapers)
JEL-codes: E32 E51 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mfd
Date: 2002-10
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http://www.dnb.nl/en/binaries/ot050_tcm47-146060.pdf (application/pdf)

Related works:
Working Paper: Bank Provisioning Behaviour and Procyclicality (2003)
Journal Article: Bank provisioning behaviour and procyclicality (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:dnb:ressup:50

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