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Journal of Financial Services Research

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18-09-2017

Western European Stakeholder Banks’ Loan Loss Accounting

Author: Jari-Mikko Meriläinen

Published in: Journal of Financial Services Research | Issue 2/2019

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Abstract

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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Interpreting impaired loans as non-discretionary factors that affect LLPs assumes that the reported figures indicate the quality of the loan portfolio (Nichols et al. 2009). Bertay et al. (2015) argue that reported impaired loans do not necessarily imply the actual occurrence of impaired loans because they can be affected by discretion. However, because IAS 39 requires banks to provide objective evidence for impaired loans, we make a similar assumption to that used by Nichols et al. (2009); we assume that reported impaired loans are ‘relatively non-discretionary’ and reflect the quality of the loan portfolio. For more discussion on this subject, see Nichols et al. (2009).

Bankscope figures for impaired loans are as reported in annual reports.

Balasubramanyan et al. (2016) end their post-crisis period in Q3:2013, which is also the end of their dataset. However, the dataset used in this study includes the years 2014–2015. Albertazzi et al. (2014), who examine the effect of the sovereign debt crisis on Italian banks, define the sovereign debt crisis as the period from 2010:Q2 to 2011:Q4, which is when their sample period ends. Arghyrou and Kontonikas (2012) argue that the sovereign debt crisis started in Greece in the autumn of 2009. In 2010, Ireland applied for emergency assistance, followed by Portugal in 2011. The second bailout package for Greece was agreed upon in 2012. Furthermore, Arghyrou and Kontonikas (2012) mark the beginning of the crisis period as August 2007, when the first emergency loan provided by the ECB to European banks. In addition, these authors identify two phases of the sovereign debt crisis: the early stage from February 2009 to February 2010 and the second stage from March 2010 to August 2011, which is when their sample period ends.

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Title: Western European Stakeholder Banks’ Loan Loss Accounting
Author: Jari-Mikko Meriläinen
Publication date: 18-09-2017
Publisher: Springer US
Published in: Journal of Financial Services Research / Issue 2/2019
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-017-0283-4