Bank-type specific determinants of sensitivity of loan-loss provisions to business cycle

ABSTRACT

In this paper, we explore several new factors which may affect the procyclicality of loan-loss provisions in all commercial and cooperative banks operating in Poland between 2000 and 2012. More specifically, we test whether there are visible differences between commercial and cooperative banks in the sensitivity of those provisions to the business cycle. Our results show that whereas loan-loss provisions are procyclical in both cases, the procyclicality is particularly prominent and stronger in the case of commercial banks, than of the cooperative banks. Additionally, in contrast to existing findings, we establish that the negative impact of the business cycle on loan-loss provisions is greater in the case of small banks than of medium or large ones, this feature being common for both commercial and cooperative banks. We have identified two factors which affect procyclicality of loan-loss provisions in different ways for commercial and cooperative banks. The first factor is the empirical importance of capital adequacy ratio size. In commercial banks, the capital ratio size exerts a statistically significant impact on the procyclicality regardless of capitalization. The other factor is discretionary income-smoothing, as we find that the statistically significant increase of procyclicality due to the high discretionary income-smoothing is present only in cooperative banks.

KEYWORDS:

• Loan-loss provisions
• procyclicality
• bank size
• capital ratio
• discretionary income-smoothing

JEL CLASSIFICATIONS:

• G21
• G28
• G32
• M41

Acknowledgements

This paper’s findings, interpretations and conclusions are entirely those of the authors and do not necessarily represent the views of institutions to which the authors are affiliated.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Małgorzata Olszak http://orcid.org/0000-0001-8920-5309

Additional information

Funding

We gratefully acknowledge the financial support provided by Polish National Scientific Centre (Narodowe Centrum Nauki (NCN)), No. of decision DEC-2012/05/D/HS4/01356.