Banks provisioning behavior and Procyclicality: An empirical analysis of European banks

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The linkage between the business cycle and the financial system has been always the subject of much research. This article investigates the relationship between bank loans loss provisions (LLPs) and the procyclicality in the context of earning smoothing behaviour. This paper also examines the impact of macroeconomic and bank-specific variables in affecting the provisioning behaviour of European banks. By using a panel data analysis from the 2002-2015 periods, our empirical results are in line with the literature work and indicate that European banks follow a procyclical behaviour regarding provisioning. Thus, provisioning turns out to be substantially important when GDP growth is lower, supporting the idea that banks fund much during the downswings business cycle and less during upswings one. The paper also finds that earning management and capital management are an important determinant of LLP. As regards the macroeconomic factors, the Generalized Method of Moments (GMM) is designed to assess the importance of inflation rate, unemployment, the interest rate spread and the money supply in influencing the LLP.

Author(s):

Ferdaous Bahri    
Institut Supérieur de Gestion, Université de Sousse
Tunisia

Taher Hamza    
Institut des Hautes Etudes Commerciale, Université de Carthage
Tunisia