Cross Country Linkages as Determinants of Procyclicality of Loan Loss Provisions – Empirical Importance of SURE Specification

Małgorzata Olszak and Mateusz Pipień

MPRA Paper from University Library of Munich, Germany

Abstract: Procyclicality in banking may result in financial instability and therefore be destructive to economic growth. The sensitivity of different banking balance sheet and income statement variables to the business cycle is diversified and may be prone to increasing integration of financial markets. In this paper we address the problem of the influence of financial integration on the transmission of economic shocks from one country to another and consequently on the sensitivity of loan loss provisions to the business cycle. We also aim to find out whether earnings management hypotheses are supported throughout the whole business cycle. Application of the SURE approach to 13 OECD countries in 1995-2009 shows that the procyclicality of LLP is statistically significant almost in thewhole sample of countries. Independent of the econometric specification, the earnings management hypotheses are hardly supported.

Keywords: loan loss provisions; procyclicality; earnings management (search for similar items in EconPapers)
JEL-codes: E32 G21 G28 (search for similar items in EconPapers)
Date: 2013-10-06
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Working Paper: Cross country linkages as determinants of procyclicality of loan loss provisions – empirical importance of SURE specification (2013)
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