Original scientific paper

https://doi.org/10.18045/zbefri.2020.2.429

Income smoothing through loan loss provisions in south and Eastern European banks

Albulena Shala orcid.org/0000-0002-8403-4536 ; University of Prishtina “Hasan Prishtina”, Faculty of Economics
Valentin Toçi orcid.org/0000-0003-1062-918X ; University of Prishtina “Hasan Prishtina”, Faculty of Economics
Skender Ahmeti orcid.org/0000-0003-2934-5777 ; University of Prishtina “Hasan Prishtina”, Faculty of Economics

Abstract

This study provides empirical evidence on income smoothing from the banking sector in nine South-Eastern Europe (SEE) countries for the period 2005-2014 by applying a number of methodological approaches. First, by using a sample of 321 banks this paper confirms our first hypothesis that banks in the SEE region use loan loss provisions (LLPs) to smooth their incomes. Second, by dividing the loan loss provision into its two components (discretionary and non-discretionary,) the study provides new evidence on the effects of loan loss provisions components on growth in bank lending. The results clearly prove our second hypothesis that the components of LLPs do matter on growth in bank lending. Third, this paper estimates the use of loan loss provisions for capital management by banks. The empirical results do not support the hypothesis of capital management for SEE banks. The novelty of this paper, unlike other works, is the inclusion of SEE countries.

Keywords

loan loss provisioning; South and Eastern European banks; income smoothing; capital management hypothesis; discretionary component; non-discretionary component

Hrčak ID:

249253

URI

https://hrcak.srce.hr/249253

Publication date:

30.12.2020.

Article data in other languages: croatian

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