Western European Stakeholder Banks’ Loan Loss Accounting

What is it about?

This study examines loan loss provisions (LLPs) in Western European banks over the 2004–2015 period. In particular, this study examines the discretionary cyclical component of LLPs and the timeliness of loan loss provisioning. Moreover, this study investigates the cyclicality of impaired loans. Banks are divided into four groups according to bank ownership type. The groups are commercial banks, cooperative banks, private savings banks and publicly owned savings banks. We thus study the implications of bank ownership type on banks’ loan loss accounting. The regression results suggest that, in general, provisions have a component that is unexplained by discretionary factors and that decreases during economic expansions and increases during recessions. However, in cooperative banks, this component is significantly smaller, suggesting that they do not decrease provisions because of, for example, over-optimism. Furthermore, stakeholder banks allocate provisions for the near-future expected losses whereas commercial banks do not. Finally, the impaired loans of savings banks are less sensitive to changes in the business cycle than those of commercial banks and cooperative banks.

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Photo by Kelly Sikkema on Unsplash

Photo by Kelly Sikkema on Unsplash