Abstract
Reducing credit procyclicality represents one of the key challenges on the regulatory agenda to reform the financial system architecture. Some early experiences may provide some insights on how countercyclical regulations may be effective. The Spanish dynamic provisions scheme implemented in 2000 is one of the main reference points in this context. We analyze the effects of dynamic provisions on managerial accounting discretion and ex-ante risk-taking behavior by banks. We empirically examine a sample of Spanish banks using quarterly information from 1995Q1 to 2013Q4. Our findings suggest that the counter-cyclicality of provisions has been reduced over time, as it has also been the case of managerial discretion (income smoothing and profit signaling). However, the results suggest that banks game on dynamic provisions by taking an ex-ante riskier behavior once the dynamic provisioning scheme is adopted.
Highlights
Reducing procyclicality is one of the key questions under discussion in the reform ofnancial regulation following thenancial crisis
Previous papers have explored particular aspects of earnings and capital management under a dynamic provisioning regime in the pre-crisis period. Our paper extends this approach by analyzing the e®ects of loan growth on managerial discretion and, on the e®ectiveness of dynamic provisions before and during the crisis.c By way of preview, our results show that the Spanish counter-cyclical provisioning scheme has been reasonably e®ective in restricting capital management and reducing the procyclicality of loan-loss provisions (LLPs) but has allowed banks to game on them by assuming higher ex-ante risk
It is worth noting that the coe±cients of the discretionary components of LLP (NOI and capital to total assets (CAP)) are signicantly lower (0.141 and À0.006) than the coe±cient of the discretionary component, nonperforming loans (NPLs) (0.184)
Summary
Reducing procyclicality is one of the key questions under discussion in the reform ofnancial regulation following thenancial crisis. Procyclicality is the phenomenon of amplifying feedbacks within thenancial system and between thenancial system and the macroeconomy. In this regard, organizations such as the Bank for International Settlements have developed proposals on countercyclical bu®ers within the developments of the Basel 3 new capital agreements. Rodriguez-Fernandez area of concern is how to mitigate the cyclical e®ects of bank lending. The focus of this paper is on this latter issue
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