Income smoothing through loan loss provisions in south and Eastern European banks

Albulena Shala (), Valentin Toçi () and Skender Ahmeti ()
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Albulena Shala: University of Prishtina “Hasan Prishtina”, Faculty of Economics, 10000 Prishtine, The Republic of Kosovo
Valentin Toçi: University of Prishtina “Hasan Prishtina”, Faculty of Economics, 10000 Prishtine, The Republic of Kosovo
Skender Ahmeti: University of Prishtina “Hasan Prishtina”, Faculty of Economics, 10000 Prishtine, The Republic of Kosovo

Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, 2020, vol. 38, issue 2, 429-452

Abstract: This study provides empirical evidence on income smoothing from the banking sector in nine South-Eastern Europe (SEE) countries for the period 2005-2014 by applying a number of methodological approaches. First, by using a sample of 321 banks this paper confirms our first hypothesis that banks in the SEE region use loan loss provisions (LLPs) to smooth their incomes. Second, by dividing the loan loss provision into its two components (discretionary and non-discretionary,) the study provides new evidence on the effects of loan loss provisions components on growth in bank lending. The results clearly prove our second hypothesis that the components of LLPs do matter on growth in bank lending. Third, this paper estimates the use of loan loss provisions for capital management by banks. The empirical results do not support the hypothesis of capital management for SEE banks. The novelty of this paper, unlike other works, is the inclusion of SEE countries.

Keywords: loan loss provisioning; South and Eastern European banks; income smoothing; capital management hypothesis; discretionary component; non-discretionary component (search for similar items in EconPapers)
JEL-codes: G21 M10 M41 M49 (search for similar items in EconPapers)
Date: 2020
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