DO BANKS GAME ON DYNAMIC PROVISIONING?

Santiago Carbo-Valverde () and Francisco Rodriguez-Fernandez
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Santiago Carbo-Valverde: CUNEF, Bangor University and FUNCAS, Calle de Leonardo Prieto Castro, 2, 28040 Madrid, Spain
Francisco Rodriguez-Fernandez: University of Granada and FUNCAS, Campus de Cartuja s/n 18011, Granada, Spain
Authors registered in the RePEc Author Service: Santiago Carbo Valverde

Journal of Financial Management, Markets and Institutions (JFMMI), 2018, vol. 06, issue 01, 1-22

Abstract: Reducing credit procyclicality represents one of the key challenges on the regulatory agenda to reform the financial system architecture. Some early experiences may provide some insights on how countercyclical regulations may be effective. The Spanish dynamic provisions scheme implemented in 2000 is one of the main reference points in this context. We analyze the effects of dynamic provisions on managerial accounting discretion and ex-ante risk-taking behavior by banks. We empirically examine a sample of Spanish banks using quarterly information from 1995Q1 to 2013Q4. Our findings suggest that the counter-cyclicality of provisions has been reduced over time, as it has also been the case of managerial discretion (income smoothing and profit signaling). However, the results suggest that banks game on dynamic provisions by taking an ex-ante riskier behavior once the dynamic provisioning scheme is adopted.

Keywords: Loan-loss provisions; bank lending; risk; financial crisis (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:jfmmix:v:06:y:2018:i:01:n:s2591768418500022

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DOI: 10.1142/S2591768418500022

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