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Banks' procyclical behavior: Does provisioning matter?

Author

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  • Vincent Bouvatier

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

  • Laetitia Lepetit

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

Abstract

A panel of 186 European banks is used for the period 1992-2004 to determine if banking behaviors, induced by the capital adequacy constraint and the provisioning system, amplify credit fluctuations. We find that poorly capitalized banks are constrained to expand credit. We also find that loan loss provisions (LLP) made in order to cover expected future loan losses (non-discretionary LLP) amplify credit fluctuations. By contrast, LLP used for management objectives (discretionary LLP) do not affect credit fluctuations. The findings of our research are consistent with the call for the implementation of a dynamic provisioning system in Europe.

Suggested Citation

  • Vincent Bouvatier & Laetitia Lepetit, 2008. "Banks' procyclical behavior: Does provisioning matter?," Post-Print hal-00838544, HAL.
    • Handle: RePEc:hal:journl:hal-00838544
    DOI: 10.1016/j.intfin.2007.07.004
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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