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Moving in tandem: bank provisioning in emerging market economies

Author

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  • Andres Murcia
  • Emanuel Kohlscheen

Abstract

We study the determinants of loan loss provisions and delinquency ratios based on the balance sheets of 554 banks from emerging market economies (EMEs). We find that provisions in EME banks respond mostly to aggregate variables, and very little to idiosyncratic factors. In particular, the bank-specific credit growth rates — usually thought of as a measure of individual risk-taking — do not explain the level of loan loss provisions. There is some evidence that earnings and the size of the intermediaries have an effect on provisions. The predominant effect however is that provisions and actual losses are negatively related to past economic growth and positively related to past aggregate credit growth. We also estimate the forward and backward-looking component of provisions, finding that provisions respond mainly to past reported losses. These findings suggest that EME banks’ provisioning decisions are highly correlated. Since provisions fall when output grows, macroprudential tools that counter this effect could dampen pro-cyclical behavior.

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  • Andres Murcia & Emanuel Kohlscheen, 2016. "Moving in tandem: bank provisioning in emerging market economies," BIS Working Papers 548, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:548
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    References listed on IDEAS

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    Cited by:

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    3. Ozili, Peterson K, 2020. "Bank loan loss provisioning during election years: cross-country evidence," MPRA Paper 96639, University Library of Munich, Germany.
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    5. de Moraes, Claudio Oliveira & de Mendonça, Helder Ferreira, 2019. "Bank’s risk measures and monetary policy: Evidence from a large emerging economy," The North American Journal of Economics and Finance, Elsevier, vol. 49(C), pages 121-132.
    6. Akhtaruzzaman, Md & Chiah, Mardy & Docherty, Paul & Zhong, Angel, 2021. "Betting against bank profitability," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 304-323.

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    Keywords

    bank credit; provisions; delinquency; emerging market; pro-cyclicality;
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