Do loan loss provisions accounting and procyclicality matter for the effects of capital on loan growth of big banks in the European Union?
Do loan loss provisions accounting and procyclicality matter for the effects of capital on loan growth of big banks in the European Union?

Summary/Abstract: The purpose of this study was to identify the impact of loan loss provisions accounting and of procyclicality of loan loss provisions on the association between the loan growth rate and the capital ratio of big banks in the European Union. To estimate this impact, we apply the two-step robust GMM approach of Blundell, Bond [1998]. The empirical analysis shows that the loan growth rate of banks which tend to smooth their earnings and banks which manage their risk more prudently as well as banks which have loan loss provisions less sensitive to a business cycle is less affected by the capital ratio. We do not find support for the view that loan growth of banks which use loan loss provisions for capital management is less affected by the capital ratio. Our results give empirical support for the macroprudential policy tools which aim to introduce forward looking provisioning, e.g. dynamic provisions or expected loss approach.

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