Working Paper: CEPR ID: DP13605
Authors: Harry Huizinga; Luc Laeven
Abstract: Loan loss provisions in the euro area are negatively related to GDP growth, i.e., they are procyclical. Loan loss provisions tend to be more procyclical at larger and better capitalized banks. The procyclicality of loan loss provisions can explain about two-thirds of the variation of bank capitalization over the business cycle. We estimate that provisioning procyclicality in the euro area is about twice as large as in other advanced economies. This difference reflects a larger procyclicality of provisioning in euro area countries already prior to euro adoption, and the divergent growth experiences of euro area countries following the global financial crisis.
Keywords: Financial Institutions; Financial Regulation; Procyclicality
JEL Codes: G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| GDP growth (O49) | loan loss provisions (G33) |
| loan loss provisions (G33) | bank stability (G28) |
| loan loss provisions (G33) | procyclicality (E32) |
| procyclicality of loan loss provisions in euro area (E44) | procyclicality of loan loss provisions in other advanced economies (F65) |