Bank provisioning behavior, procyclicality and capital management in south-eastern Europe

Abstract

Regulators and policymakers pay an increasing attention to the possible pro-cyclical nature of banks’ behavior in provisioning. Loan-loss provisioning practices of banks are perceived as one of the sources of this procyclicality. The main objective of this study is to provide the evidence on procyclical behavior and capital management of banks through loan-loss provisions in South-Eastern European countries for the period 2004 – 2015. Our results show that loan-loss provisions of banks are procyclical; however, there is no evidence to indicate a relationship between loan-loss provisions and capital management. The find-ings suggest that a dynamic provisioning system would be beneficial if it is im-plemented in South-Eastern Europe. The results also show an empirical evidence that loan-loss provisions are not used for income smoothing in banks in South-Eastern Europe.