Loan loss provisions of European banks – Does macroprudential tightening matter?

Małgorzata Olszak, Christophe Godlewski, Sylwia Roszkowska and Dorota Skała

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Abstract: In this paper, we study the relation between macroprudential policy and loan loss provisioning policy of European banks between 1996 and 2019. We analyse both the level of loan loss provisions (LLP) and their use in income smoothing by banks. Overall, we demonstrate that macroprudential tightening actions are associated with changes in LLP policy. Banks decrease their LLP when macroprudential policies are tightened and this result is particularly strong under Basel III. In parallel, we find that macroprudential tightening exacerbates income smoothing in the pre-Basel III period and diminishes it under Basel III. Links between LLP policy and macroprudential policy strongly depend on the category of tools that are being tightened. In particular, instruments relating to provisioning standards are associated with increased LLP, while lower LLP are observed when a tightening occurs in tools connected with taxes on financial institutions and activities.

Date: 2024-11-05
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Published in Research in International Business and Finance, 2024, 73, pp.102642. ⟨10.1016/j.ribaf.2024.102642⟩

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Related works:
Journal Article: Loan loss provisions of European banks – Does macroprudential tightening matter? (2025)
Working Paper: Loan loss provisions of European banks – does macroprudential tightening matter? (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04768461

DOI: 10.1016/j.ribaf.2024.102642

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