Shareholder shocks and loan loss provisions in Central European banks

Dorota Skała

Journal of International Financial Markets, Institutions and Money, 2020, vol. 69, issue C

Abstract: We examine loan loss provisions (LLP) in banks as a previously unexplored channel of shock transmission between foreign banks and their subsidiaries. We focus on discretionary LLP, controlling for the underlying credit risk and previously created loan loss reserves. We study negative and positive shocks in order to account for LLP cyclicality. Using a sample of 71 Central European foreign-owned banks, we find that shocks suffered by shareholders are connected to changes of discretionary LLP at subsidiary banks. Moreover, the type of shareholder shock matters. Banking sector and shareholder-specific adverse shocks are associated with higher LLP. Negative macroeconomic shocks are paired with a lower level of LLP, but this effect disappears if the shock is wide and also encompasses banking sectors or capital markets. In addition, we find that positive shocks to shareholder profitability incur higher discretionary LLP. Our findings contribute to the shock transmission literature, which to date has mostly focused on the consequences of shareholder shocks for subsidiary bank loan supply. We demonstrate that LLP can also be affected.

Keywords: Loan loss provisions; Shock transmission; Central European banks (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1042443120301281
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:69:y:2020:i:c:s1042443120301281

DOI: 10.1016/j.intfin.2020.101244

Access Statistics for this article

Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

More articles in Journal of International Financial Markets, Institutions and Money from Elsevier
Bibliographic data for series maintained by Catherine Liu ().