What drives discretionary loan loss provisions? The role of banks’ business model, listing status and COVID-19 crisis in the European banking sector

Author/s Alessandra Allini, Fiorenza Meucci, Flavio Spagnuolo, Annamaria Zampella
Publishing Year 2023 Issue 2023/2 Language English
Pages 26 P. 71-96 File size 234 KB
DOI 10.3280/FR2023-002003
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Purpose: This study examines whether banks’ business models and listing sta-tus drive the discretionary use of loan loss provisions (LLPs) under the Interna-tional Financial Reporting Standard (IFRS) 9 "Financial Instruments". Design/methodology/approach: Ordinary least squares regression is per-formed on a sample of 5,147 listed and unlisted European banks for the 2018-2021 period. Findings: The main results show that after Expected Credit Loss (ECL) im-plementation, banks are prone to manage their earnings via LLPs. In detail, origi-nate-to-hold and listed banks use LLPs to manage their earnings more strongly than originate-to-distribute and unlisted banks. Further, during the financial crisis due to the COVID-19 pandemic, European banks tended to manage earnings more than during the pre-crisis period. Originality/value: This study contributes to the existing literature by expand-ing research on LLPs and highlighting ex-ante factors that might influence banks’ provisioning behavior, such as their listing status and business model. Practical implications: This study provides useful insights for regulators and accounting setters in making informed decisions regarding provisioning policies, even during periods of turmoil.

Keywords: loan loss provisions, business model, listing status, earnings manage-ment.

Jel codes: M40, M41

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Alessandra Allini, Fiorenza Meucci, Flavio Spagnuolo, Annamaria Zampella, What drives discretionary loan loss provisions? The role of banks’ business model, listing status and COVID-19 crisis in the European banking sector in "FINANCIAL REPORTING" 2/2023, pp 71-96, DOI: 10.3280/FR2023-002003