| Cavallo and Majnoni Period: 1988 to 1999 Publication: 2001 |
Estimation of an equation in which the provision is a function of: (i) specific variables of the banks, (ii) macroeconomic variables, and (iii) institutional variables, with the use of three different techniques (OLS cross section, pooled cross section, and panel fixed effect estimation). |
Strong evidence that the relationship between the provision and the earnings of banks from the G-10 countries presents a positive sign. The same sign is negative for banks from countries outside the G-10, which on average present much smaller provisions in good periods and are forced to increase them in bad periods. |
| Bikker and Hu Period: 1979 to 1999 Publication: 2002 |
To identify the relationship between the provision and the business cycle, three macroeconomic variables (real GPD growth, unemployment, and inflation) and three specific variables of the banking sector (loans, net financial intermediation earnings, and defaults) were used as explanatory variables for the provision in the linear regression. |
Increases in the provision depend a lot on the business cycle. In bad times, the provisions increase. Banks contribute significantly more to the provisions in years of relatively higher earnings (as a precaution or as a way of smoothing income), leading the sector to be less pro-cyclical than it should. |
| Laeven and Majnoni Período: 1988 to 1999 Publication: 2003 |
In the linear regression, the provisions are a result of the earnings before income tax and of the provisions for losses; of the real growth in loans; of the real growth in GDP per capita; and of the year dummies. |
Many banks delay the recognition of provisions as much as possible, recording them when an economic contraction has just taken hold and thus increasing the impact of economic cycles on earnings and on capital. |
| Bikker and Metzemakers Period: 1991 to 2001 Publication: 2004 |
Based on the models by Cavallo and Majnoni (2002) and by Laeven and Majnoni (2003), the authors worked with additional variables such as GDP growth and dummies for the countries. The use of the provision for capital management was also tested. |
The provisions of banks are usually substantially greater in periods of lower GDP growth, reflecting the growing risk of their credit portfolios when the economic cycle changes and enters into a downturn. This effect is mitigated by an increase in the provision in periods of higher earnings and in those in which the growth in the volume of lending becomes greater. |
| Handorf and Zhu Period: 1990 to 2000 Publication: 2006 |
The model is based on the assumption that the provision (dependent variable) is a linear function of two variables: (i) the initial value of the accumulated provision, net of the falls or losses ex-post of the current period; and of management’s expectations in relation to future falls, based on current available information. |
There is a positive correlation between the provision and GDP. The empirical tests do not support the pro-cyclicality of the provision in banks. The results were different depending on the size of the institutions. Medium-sized banks tend to use information on projected losses when defining the value of the provision (countercyclical attitude). Smaller banks and much bigger banks tend towards provision practices that consider current losses (pro-cyclical attitude). |
| Bouvatier and Lepetit Period: 1992 to 2004 Publication: 2007 |
The model evaluates whether the evolution of the provision explains the changes in banks’ behavior in relation to lending during the economic cycle. The linear regression model estimated the discretionary and non-discretionary components of the provision. The authors introduced the lagged dependent variable as an explanatory variable, in order to consider a dynamic adjustment in the provision. Capital management, earnings management, and the signaling of equity robustness are also important variables. |
Setting provisions to cover expected future losses in loans (“non-discretionary provisions”) causes major fluctuations in credit. The non-discretionary component of the provision amplifies the credit cycle: in an economy rising phase, banks tend to underestimate credit risks, indicating the existence of greater incentives for the granting of new loans since the costs of lending are undervalued. Provisions with managerial purposes (discretionary provisions) do not produce the same effect. |
| Glen and Mondrágon-Vélez Period: 1996 and 2008 Publication: 2011 |
The effects of business cycles on the performance of banks’ loans portfolios in developing countries were analyzed using linear and non-linear models. The provision was the proxy for the portfolio’s performance. GDP and other macroeconomic variables were considered as explanatory variables. The interest rate on loans and a set of variables with the individual characteristics of the banks of each country were also considered. |
While economic growth is the main driver in the performance of banks’ credit portfolios, the effects caused by the interest rates are second order. The relationship between the provisions and economic growth is highly linear only in economic conditions of extreme stress. Greater loss provisions are related to the private sector leverage level, to the bad quality of a loans portfolio, and to the absence of penetration and capitalization of the financial system. |
The cyclicality of loan loss provisions under three different accounting models: the United Kingdom, Spain, and Brazil