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

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  • Olszak, Małgorzata
  • Godlewski, Christophe J.
  • Roszkowska, Sylwia
  • Skała, Dorota

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.

Suggested Citation

  • Olszak, Małgorzata & Godlewski, Christophe J. & Roszkowska, Sylwia & Skała, Dorota, 2025. "Loan loss provisions of European banks – Does macroprudential tightening matter?," Research in International Business and Finance, Elsevier, vol. 73(PB).
    • Handle: RePEc:eee:riibaf:v:73:y:2025:i:pb:s0275531924004355
    DOI: 10.1016/j.ribaf.2024.102642
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    Keywords

    Macroprudential policy; loan loss provisions; income smoothing; policy tightening; EEA;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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