Procyclicality of loan-loss provisions and competitive environment – a global perspective
International Journal of Emerging Markets
ISSN: 1746-8809
Article publication date: 13 May 2022
Issue publication date: 12 December 2023
Abstract
Purpose
Despite the extensive debate on the impact of bank competition on risk-taking, there is no evidence of its role in procyclicality of loan-loss provisions (LLPs). The purpose of this study is to find out what is the role of competition in the procyclicality of LLPs.
Design/methodology/approach
Using over 70,000 bank-level observations in 103 countries in 2004–2015 and the LLPs model, this study interacts competition with business cycle to check what is the effect of competition on procyclicality of LLPs.
Findings
This study finds that intense competition is associated with more procyclicality of LLPs. Increased procyclicality of LLPs in a more competitive environment is binding for high-income countries. The opposite effect is shown for low-income countries.
Research limitations/implications
Future research can be extended by testing the role of additional factors – such as regulations, supervision or institutional protection of shareholders' rights, in the association between procyclicality and competition.
Practical implications
The main message of this paper is that the competitive environment changes the procyclicality of LLPs. The results are important from the point of view of the COVID-19 pandemic because government interventions during lockdowns will affect competition in the banking industry and in other industries of the economy.
Originality/value
This paper contributes to the extant research in three dimensions. First, it shows that competition is an important factor behind procyclicality of LLPs. Second, it adds to the research on the links between competition and financial stability. Third, it shows that the link between competition and procyclicality of LLPs depends on the economic development of the country in which the banks are located.
Keywords
Acknowledgements
The authors gratefully acknowledge the financial support provided by the National Science Centre (NCN) in Poland (No: DEC-2016/23/B/HS4/02230). The authors thank the participants of the 10th International Conference of Financial Engineering and Banking Society in Lille (October 2021) and the 14th International Risk Management Conference (IRMC) in Cagliari (September 2021) for fruitful comments and suggestions. This paper’s findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of the institutions with which the authors are affiliated.
Citation
Olszak, M.A. and Kowalska, I. (2023), "Procyclicality of loan-loss provisions and competitive environment – a global perspective", International Journal of Emerging Markets, Vol. 18 No. 12, pp. 5940-5971. https://doi.org/10.1108/IJOEM-01-2022-0060
Publisher
:Emerald Publishing Limited
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