Loan loss provisions and macroeconomic shocks: some empirical evidence for Italian banks during the crisis

Abstract

Copyright © 2017 The Authors. This paper uses data from a panel of more than 400 Italian banks for the period 2001 – 2015 to examine the main determinants of loan loss provision (LLP), which are classified as either discretionary (income smoothing, capital management, signalling) or non-discretionary (related to the business cycle). The possible effects of the double-dip recession of 2008-9 and 2011-15 are also examined. The results suggest that LLP in Italian banks is countercyclical, with non-discretionary components and macroeconomic shocks playing a significant role. Moreover, LLP is less cyclical in the case of local banks, since their loans are more collateralized and their behaviour is more strongly affected by supervisory activity.