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Faculty of Management Working Paper Series


Aims and Scope

The aim of University of Warsaw Faculty of Management Working Paper Series  (ISSN 2300-4371) is to get the findings out quickly, even if the presentations are less than fully polished. 

 

The papers published in the FMWPS can be both empirical and theoretical studies. Research areas covered by the FMWPS include: economics, finance, banking, management, marketing as well as quantitative methods. 

FMWPS are written by researchers employed at  the Faculty of Management of UW and by other economists, who present their research results in conferences or seminars organised by the Faculty or who would like to publish their findings in FMWPS. 

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Abstract WPS 4/2016

Macroprudential policy instruments and procyclicality of loan-loss provisions – cross-country evidence

 

  • Małgorzata Olszak
  • Iwona Kowalska
  • Sylwia Roszkowska

 

We analyze the effectiveness of various macroprudential policy instruments in reducing the procyclicality of loan-loss provisions (LLPs) using individual bank information from over 65 countries and applying the two-step GMM Blundell-Bond (1998) approach with robust standard errors. Our research identifies several new facts. Firstly, borrower restrictions are definitely more effective in reducing the procyclicality of loan-loss provisions than other macroprudential policy instruments. This effect is supported in both unconsolidated and consolidated data and is robust to several robustness checks. Secondly, dynamic provisions, large exposure concentration limits and taxes on specific assets are effective in reducing the procyclicality of loan-loss provisions. And finally, we find that both loan-to-value caps and debt-to-income ratios, are especially effective in reducing the procyclicality of LLP of large banks. Off-balance-sheet restrictions, concentration limits and taxes are also effective in reducing the procyclicality of LLP of large banks. Dynamic provisions reduce the procyclicality of LLP independently of bank size.

Keywords: macroprudential policy, loan-loss provisions, business cycle, procyclicality

JEL Classification: E32, G21, G28, G32

 

 

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Abstract WPS 3/2016

BANK-SPECIFIC DETERMINANTS OF SENSITIVITY OF LOAN-LOSS PROVISIONS TO BUSINESS CYCLE

 

  • Małgorzata Olszak
  • Patrycja Chodnicka-Jaworska
  • Iwona Kowalska
  • Filip Świtała

 

In this paper we explore several new factors which may affect the procyclicality of loan-loss provisions. In particular, we test whether there are visible differences in sensitivity of loan-loss provisions to the business cycle between commercial and cooperative banks as well as between large, medium and small banks. We also aim to find out whether the level of bank capital ratio and the application of discretionary income-smoothing affect procyclicality of loan-loss provisions. Our results show that loan-loss provisions of banks are procyclical. This procyclicality is particularly visible and stronger in the sample of commercial banks. We also find that loan-loss provisions of large banks are more negatively affected by the business cycle than those of medium or small banks. We show that banks with low capital ratios exhibit increased procyclicality of loan-loss provisions. And finally, we also find empirical evidence that banks with a greater degree of discretionary income-smoothing have loan-loss provisions more negatively affected by the business cycle, and thus more procyclical.

Keywords: loan-loss provisions, procyclicality, bank size, capital ratio, discretionary income-smoothing

JEL Classification: G21, G28, G32, M41

 

 

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