Business cycles and bank regulations – what happens to bank provisioning? A more comprehensive look at 49 countries

Abstract

Numerous researchers provide evidence that many banks intend to increase their Loan Loss Provisioning (LLP) when the economy is in a downward trend. However, the answer whether banks provide sufficient provisions when the economy is in an upturn trend remains unsolved. Furthermore, provisioning must be influenced not only by business cycles and bank earnings, but also by the regulatory system. Nevertheless, empirical research on this issue has been scarce. Thus, this study intends to answer two questions shown above. The evidence shows that with steady growth in both the economy and bank earnings, the bank management will tend to increase LLP, whereas with a buoyant economy but negative growth in bank earnings, the management will exhibit an inclination to reduce LLP. As regards the influence of bank regulation on provisions, the evidence shows that, under certain circumstances, banks make more provision based on regulatory considerations. This explains why bank regulations regarding LLP across countries do have an impact on banks’ provisioning behaviour.