Credit policy in small Polish banks - is there room for income smoothing?

Dorota Skała

Collegium of Economic Analysis Annals, 2014, issue 34, 183-196

Abstract: We study credit policy in a unique sample of c.360 Polish cooperative banks between 2007–2012. We find evidence for income smoothing through loan loss provisions, indicating that cooperative banks take advantage of higher earnings to make reserves for periods when their profitability might decrease. Similarly to commercial banks, provisions of cooperative banks are procyclical towards the macroeconomic cycle. When regional economic conditions deteriorate, cooperative banks increase their provisioning and this is especially visible when the economic slumps are severe. These results indicate that the different shareholder structure of cooperative banks does not affect managerial incentives for income smoothing. Thus, problems of cyclicality in the cooperative sector should be addressed by local policymakers in the same extent as that of cyclicality in the commercial banking sector.

Date: 2014
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