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Discretionary provisioning practices among Western European banks

Author

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  • Peterson K. Ozili

Abstract

Purpose - The purpose of the study is to investigate whether discretionary ‘loan loss provisioning’ by Western European banks is driven by income smoothing or credit risk considerations. Design/methodology/approach - To test the income smoothing hypothesis, the study uses ordinary least square regression to examine the relation between loan loss provisions and earnings before tax and loan loss provisions in the post-financial crisis period. Findings - The authors find evidence that discretionary provisioning by Western European banks is driven by income smoothing incentives in the post-financial crisis period, particularly, among listed banks. Also, it is observed that discretionary provisioning is significantly influenced by credit risk factors, mainly, non-performing loans and loan growth. Also, it is found that discretionary provisioning by Western European banks is procyclical with fluctuations in the economic cycle. Overall, the implication of the findings is that discretionary provisioning among Western European banks is driven by both income smoothing and credit risk considerations. Originality/value - This study focus on banks in Western Europe in contrast to prior European studies.

Suggested Citation

  • Peterson K. Ozili, 2017. "Discretionary provisioning practices among Western European banks," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 9(1), pages 109-118, April.
  • Handle: RePEc:eme:jfeppp:jfep-07-2016-0049
    DOI: 10.1108/JFEP-07-2016-0049
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    Citations

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    Cited by:

    1. Ozili, Peterson K & Outa, Erick R, 2018. "Bank Earnings Smoothing During Mandatory IFRS adoption in Nigeria," MPRA Paper 89690, University Library of Munich, Germany.
    2. Ozili, Peterson K, 2019. "Bank Income Smoothing, Institutions and Corruption," MPRA Paper 92339, University Library of Munich, Germany.
    3. Ozili, Peterson K, 2017. "Bank Loan Loss Provisions, Investor Protection and the Macroeconomy," MPRA Paper 80147, University Library of Munich, Germany.
    4. Wahyoe Soedarmono & Iman Gunadi & Sudiro Pambudi & Ade Dwi Aryani, 2022. "Bank Loan Loss Provisioning And Procyclicality Revisited: Evidence From Indonesia," Working Papers WP/02/2022, Bank Indonesia.
    5. Ozili, Peterson Kitakogelu, 2021. "Bank earnings management using loan loss provisions: comparing the UK, France, South Africa and Egypt," MPRA Paper 108506, University Library of Munich, Germany.
    6. Ozili, Peterson K & Outa, Erick R, 2018. "Bank Income Smoothing in South Africa: Role of Ownership, IFRS and Economic fluctuation," MPRA Paper 102567, University Library of Munich, Germany.
    7. Ozili, Peterson K, 2017. "Bank Loan Loss Provisions Research: A Review," MPRA Paper 76495, University Library of Munich, Germany.
    8. Deepa Mangala & Neha Singla, 2021. "Quality of Reported Earnings: An Empirical Study of Indian Banking Industry," Vision, , vol. 25(2), pages 159-167, June.
    9. Ozili, Peterson K, 2022. "Determinants of bank income smoothing using loan loss provisions in the United Kingdom," MPRA Paper 112047, University Library of Munich, Germany.
    10. Ozili, Peterson K, 2017. "Earnings Management in Interconnected Networks: A Perspective," MPRA Paper 92647, University Library of Munich, Germany.
    11. Ozili, Peterson K, 2018. "Bank Loan Loss Provisions, Investor Protection and the Macroeconomy," MPRA Paper 80281, University Library of Munich, Germany.
    12. Albulena Shala & Valentin Toçi & Skender Ahmeti, 2020. "Income smoothing through loan loss provisions in south and Eastern European banks," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 38(2), pages 429-452.
    13. Ozili, Peterson K, 2017. "Bank Earnings Smoothing, Audit Quality and Procyclicality in Africa: The Case of Loan Loss Provisions," MPRA Paper 92646, University Library of Munich, Germany.
    14. Pandey, Ashish & Guhathakurta, Kousik, 2022. "Value relevance of loan loss provision components and the choice of model specification," Advances in accounting, Elsevier, vol. 58(C).
    15. Ozili, Peterson Kitakogelu, 2021. "Big 4 auditors, bank earnings management and financial crisis in Africa," MPRA Paper 108608, University Library of Munich, Germany.
    16. Ozili, Peterson K., 2019. "Bank income smoothing, institutions and corruption," Research in International Business and Finance, Elsevier, vol. 49(C), pages 82-99.
    17. Konstantinos Vasilakopoulos & Christos Tzovas & Apostolos Ballas, 2021. "Banks’ Risk and The Impact of Audit Quality on Income Smoothing," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 20(3), pages 425-453, September.

    More about this item

    Keywords

    Financial institutions and services; Financial markets and institutions; Income smoothing; Accounting and auditing; Managerial discretion; Bank regulation; C21; C23; G21; M41;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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