Provisioning and Non-Performing Exposures during the

Financial Crisis: are Italian Banks Special?

Alessandro Carboni, Andrea Carboni
This Draft: November 2015

Abstract
Using a sample of 500 Italian banks over the period 2007 - 2014, our paper provides evidence on the hypothesis behind the management of credit risk provisions
and non-performing exposures for the entire banking system and for different types
of banks, clustered on dimension. We also study on the behavior of riskier banks and
offer an interpretation of higher provisions during recent episodes of unconventional
monetary measures. We summarize our main results in these points. First, provisions
of Italian banks support the earnings management and the capital management hypothesis, reflecting their procyclicality. Second, the evidence shows that banks with
different dimensions do not have the same response to selected determinants. In particular, macroeconomic variables affect provisioning only for medium and large banks,
the capital management hypothesis holds for cooperative and small banks, while the
earnings management is not validated for large banks. Third, non-performing loans
are highly persistent for cooperative and small banks, while the hypothesis regarding
efficiency, profitability and risk-taking are confirmed in relation to non-performing
loans. Fourth, we also observe that banks with weaknesses in credit risk practices
have insufficient provisions and therefore need more non-discretionary income to enlarge their coverage capacity. They also violate the capital management hypothesis.
Finally, results show increased sensitivity of provisions to earnings in 2011 - 2013, due
to unconventional measures.

JEL Classification: G01, G21, G28.

Keywords: Non-performing exposures, loan loss provisions, general and specific reserves,
earnings management, capital management.

University of Siena, MEBS. Comments are welcome. Alessandro Carboni: alecarbo@msn.com. Andrea
Carboni: andreacarbo@tiscalinet.it. We would like to thank Alison Loijens (Bankscope) for her precious
assistance. Errors and omissions remain our own responsibility.

Introduction

At the end of 1995 bad loans was greater than 10 per cent of total lending. Over the following years Italian banks reduced this ratio, thanks to favorable macroeconomic conditions,
improvements in credit risk models and techniques to manage and mitigating credit risk. A
significant role was also played by the securitization of problem loans and their transfer to
asset management firms specialized in recoveries of distressed assets. Bank of Italy, which
has frequently expressed on the need to reduce the stock of non-performing exposures,
conducted an assessment in 2013 on the adequacy of provisioning against impaired loans
(bad debts, substandard and restructured loans), but also on collateral and the borrowers
sector of activity.1 Moreover, other initiatives (Bank of Italy, 2015) have been taken to
alleviate problems in banks balance sheets due to non-performing exposures, such as fiscal
reforms, to provide full and immediate tax deductibility of loan write-downs and writeoffs, with the purpose to develop an Italian market of impaired assets. Even if the Italian
economy is on a path to recovery, with increasing demand for new loans by households
and firms, the stock of non-performing loans in proportion to total loans is at the moment
unacceptably high; also, coverage ratios remain stable. Reducing problem loans is crucial
to support credit growth and restore the bank lending channel. Unfortunately the link
between non-performing exposures and provisioning is far from being understood at all.
Banks loan loss reserves are a balance sheet item used to reduce the value of total loans
by the amount of losses that the bank managers anticipate in the most likely future state
of the world (Balla and Rose, 2015). Loan loss reserves measures cumulative provisions
minus write-offs and constitute a pool of reserves to provide a cushion against losses.
Loan loss provisions (LLP) refer to the charge made through a provision expense item
in the income statement to take account of expected loan losses during a given reporting
period. Therefore, as stated, LLP have a significant effect on earnings and regulatory
capital, especially for their degree of subjective judgment, as suggested by Bikker and
Metzemakers (2005). The discretionary use of LLP has been broadly discussed in the
literature. A first type of managerial discretion for LLP is the income smoothing through
earnings management: bank managers increase provisions during periods of economic
expansion, lowering them during downturns. This practice reduces the variability of banks
income stream over time, with a resultant signal of financial stability, influencing external
ratings and funding costs (Fudenberg and Tirole, 1995). The signaling motive of LLP is
also analyzed in Lobo and Yang (2001). The exercise of income smoothing is identified
with a positive relation between discretionary accruals, represented by loan loss reserves
or LLP, and a non-discretionary income item, in the form of income before taxes and LLP.
Perez et al. (2008) find evidence of income smoothing in the Spanish banking system.
Fonseca and Gonz
alez (2008) study the role of bank income smoothing in a cross-country
analysis and find that income smoothing depends mainly on regulation and supervision,
financial structure and financial developments. Bushman and Williams (2012) detect
1

See Bank of Italy (2013)

countercyclical effects through non-discretionary income, while Balboa et al. (2013) have
analyzed different earnings management strategies. More recently, Domikovsky et al.
(2014) find evidence of earnings management for German banks, while Balla and Rose
(2015) examine the relationship between earnings and provisions before and after a SEC
intervention in the United States and find a different link according to the ownership
structure (publicly vs privately-held banks). The paper of Caporale et al. (2015) is the
closest to ours. They study a group of Italian banks for the period 2001 - 2012 and find
evidence that LLP are driven mainly by non-discretionary components.
The second type of managerial discretion relates to the capital management hypothesis:
according to Bikker and Metzmakers (2005), this hypothesis assumes that banks with low
Tier I capital ratio are inclined to make more general loan loss provisions in order to
keep their capital ratios adequate. Ahmed et al. (1999), Wall and Koch (2000) and
Barth et al. (2004), among others, analyze this aspect, especially after the introduction
of Basel I, while Hoggarth and Pain (2002), Shrieves and Dahl (2003) and Handorf and
Zhu (2006) study the case of UK, Japan and the US. Caporale et al. (2015) also apply
similar analysis to Italian banks. Moreover, to the extent that general provisions are taxdeductible, managers have an incentive to increase provisions. This aspect is analyzed in
a paper of Beatty et al. (1995).
Together with the four mentioned motives (earnings, signaling, capital and tax) another important strand of the literature reviews the procyclicality of loan loss provisions
and its impact on bank lending, which is particularly useful during crisis times, when
probability of loan defaults increases. Banks should react by lowering provisions during
favorable economic conditions and by increasing them during a downturn. However, there
is a concern about the fact that this behavior could prolong the bad times. Cavallo and
Majnoni (2002), Laeven and Majnoni (2003) and Bouvatier and Lepetit (2008) analyze the
procyclical effects of LLP with cross-country data, arguing that banks delay provisioning
for bad loans until economic downturns have already begun, amplifying the impact of the
economic cycle on banks income and capital. Beatty and Liao (2011) and Bouvatier and
Lepetit (2012) study the extent to which the delayed build-up of LLP could affect lending
during the downturn, exacerbating a credit crunch. They find that backward-looking provisions could amplify the procyclicality of bank lending, while this effect does not appear
with forward-looking behavior. On the other hand, Borio et al. (2001), suggested a countercyclical perspective of provisions, noting that credit risk grows up in an expansionary
phase and manifests in a recessionary one. Therefore, provisions should be positively correlated with the lending cycle, Asea and Blomberg (1998) and Keeton (1999), denoting a
prudential bank behavior through an increase in loan loss reserves. Balla and Rose (2015),
criticizing the incurred-loss model under FASB standard, also study the process by which
loan losses are not recognized until recession and the consequent behavior of provisioning
during the lending cycle.
Recently, Bergthaler et al. (2015) for Europe, and Jassaud and Kang (2015) for Italy,
together with Bank of Italy and ECB financial stability reports have emphasized the
importance of a strategy to tackling the issue of problem loans, which emerged in the
3

downward phase of the lending cycle.2 In a recent paper, Carboni and Carboni (2014)
study the evolution of non-performing loans for the Italian banking sector over the last
twenty years and show how credit risk change according to different credit regimes in the
lending cycle. Moreover they provide an exhaustive survey of the determinants of bad loans
and their implications to the real economy. To ease of exposition we only remember the
studies of Berger and DeYoung (1997), Salas and Saurina (2002) and Louzis et al. (2010),
Nkusu (2011) and Klein (2013) who develop theory and evidence about the impact of
macroeconomic, banking and borrower determinants on non-performing loans.
In this context our study adds to the discussion providing evidence on the hypothesis
behind the management of credit risk provisions (LLP and reserves) and non-performing
exposures (doubtful and substandard loans) during financial crisis. Our paper extends
the analysis on the Italian banking system and on different types of banks, clustered on
dimension. Moreover, we concentrate on the behavior of banks with low coverage ratio and
high stock of non-performing exposures, but also offer an interpretation of the increase in
provisions during recent episodes of unconventional measures. Our results are in line with
the findings of the literature. Provisions of Italian banks support the earnings management
and the capital management hypothesis, reflecting their procyclicality. Moreover, evidence
shows a different reaction according to bank dimension: macroeconomic variables affects
provisioning only for medium and large banks; the capital management hypothesis holds
for cooperative and small banks, while the earnings management is not validated for large
banks. Findings for non-performing loans denote higher persistence for cooperative and
small banks and the confirmation of the hypothesis regarding efficiency, profitability and
risk-taking. Estimates are robust to various model specifications. Our evidence supports
the view that banks with weaknesses in credit risk practices have insufficient provisions
and therefore need more non-discretionary income to enlarge their coverage capacity. They
also violate the capital management hypothesis. Finally, results show increased sensitivity
of provisions to earnings in 2011-2013, due to unconventional measures.
The remainder of the paper is structured as follows: Section (2) discusses the hypothesis regarding provisions and non-performing loans. Section (3) describes the database and
definitions while Section (4) details the econometric methodology. Section (5) presents
results of the empirical analysis, in Section (6) we conduct robustness exercises, while in
Section (7) we analyze riskier banks and the effect of unconventional measures. Finally,
conclusions are offered in Section (8).

Hypothesis

In order to measure cyclical effects of provisions and loan loss reserves, focusing on the
credit quality of the loan portfolio and on the impact of the economic situation, we empirically test the following hypothesis:
2
In this paper we do not deal the solutions to the problem of non-performing loans. See the cited studies
and technical documents.

Hypothesis 1a. The relationship between credit risk practices and LLP / loan loss
reserves.
Hypothesis 1b. The relationship between macroeconomic variables and LLP / loan
loss reserves.
As discussed in the Introduction, Fonseca and Gonzalez (2008), among others, describe
bank income smoothing by using loan loss provisions, defining the capital management and
the earnings management hypothesis. For the first, bank managers use LLP to manage
capital ratios, reducing the expected regulatory costs associated with capital requirements.
We therefore expect a negative sign for the relationship. For the second, banks should
react by lowering provisions during favorable economic conditions and by increasing them
during a downturn. In this case, we expect a positive sign between earnings and LLP.
Hence, based on the preceding discussion, we empirically test the following hypothesis:
Hypothesis 2. Capital management hypothesis: the negative relationship between capital ratio and LLP / loan loss reserves.
Hypothesis 3. Earnings management hypothesis: the positive relationship between income and LLP / loan loss reserves.
For the non-performing exposures, measured by two types of risky loans, hypothesis
follow the rationales of Berger and DeYoung (1998), Salas and Saurina (2002), Louzis et
al. (2010), among others. The hypothesis we want to test are:
Hypothesis 4. Bad luck hypothesis: external events are drivers for an increase in
non-performing exposures, i.e. past bad economic situation is positively related to nonperforming exposures.
Hypothesis 5. Bad management and skimping hypothesis: a positive relationship between lower cost efficiency (i.e. poor skills, problems and low investments in monitoring)
and non-performing exposures.
Hypothesis 6. Moral hazard hypothesis: a negative relationship between capital and
future non-performing exposures, via a risk-taking behavior of banks.
Hypothesis 7. Bad management II hypothesis: a positive relationship between worse
banking performance and future non-performing exposures.

Data selection and definitions

We obtain Italian bank balance-sheet data from Fitch IBCAs Bankscope database (Bureau van Dijk) for the 2007 - 2014 period, with an yearly frequency. In order to deal
with the heterogeneity of credit risk policies and conditions of Italian banks, we use unconsolidated data similar to Albertazzi and Marchetti (2010) and Duran et al. (2015),
among others. The selection process follows these steps. First, we concentrate on listed
and unlisted banks with six different bank specializations: holding, commercial, cooperative, investment, private banking & asset management and savings. The definition of
cooperative banks in the Italian banking law involves banche popolari and banche di
credito cooperativo. The first are small cooperative banks operating at a national or
regional level, while the second are local cooperative banks operating at a regional or
sub-regional level because of legal constraints.3 Following Bonaccorsi di Patti and Sette
(2012), we call them mutual banks. Second, to ensure consistency we retain only those
banks with at least four years of consecutive accounting information on credit risk with
an unbalanced panel of 500 banks over eight years, described in Table (1).4 Our sample
reflects the cooperative-oriented feature of Italian banking system: cooperative banks have
a weight of approximately 78%, while commercial and saving banks cover approximately
11% and 6% respectively.5 The last two columns of Table (1) show that the composition
of our sample remains relatively stable through the years, except in 2014, due to missing
accounting information at the time we collected data.6 Finally, the last two rows provide
a summary and the detail of the number of bank-year observations for the entire panel.
Our paper studies credit risk in loan portfolios focusing on provisioning and on the
amount of non-performing loans. More specifically, the variables of interest are: 1) loan
loss provisions (LLP), 2) general loan impairment reserves (general reserves), 3) specific
loan impairment reserves (specific reserves), 4) doubtful and 5) substandard loans, as a
percentage of total assets. LLP take account of identified probable loan losses during
a reporting period, while general and specific reserves measure cumulative provisions as
a cushion against total loan-losses. General reserves are set aside for general default
3

Recently cooperative banks in Italy have been subject to reforms. For small cooperatives (Banche
popolari), Italian baking law and prudential regulation consider that bigger banks (total asset greater than
8 billions e) must be transformed in limited companies, similar to commercial banks. At the moment, on
the other hand, the Progetto di autoriforma del credito cooperativo is under discussion: the objective
is to preserve the main features of local banks, with equal attention to the rules in the European Banking
Union. See Barbagallo (2015).
4
The Bankscope database has a number of documented flaws. For example, Gambacorta (2005) confirms
differences between regulatory data and those provided by Bankscope for Italian banks. More recently, Ferri
et al. (2014) find that: many banks classified as savings banks in Bankscope are essentially commercial
retail banks, especially in Italy. (Please refer to note 9, page 197 of the paper.) We also observe an
inclusion of small cooperative banks amongst the commercial category.
5
We have nevertheless decided to include Banca Sella Holding SpA as the only bank holding company.
Moreover, there are 32 small cooperative banks, covering 6.40% of the entire sample: on average, 12% of
them are commercial banks, while 88% cooperative banks.
6
In early June.

risk and are thus directed against expected losses within the credit portfolio, not related
to a particular loan with certainty. On the other hand, specific reserves are built to
cover losses that have already been incurred and are related to identified problem loans.
Doubtful loans are loans that are 90+ days past-due for which the collection in full is
improbable, while substandard loans are loans that are 90+ days past-due in respect to
which there is a substantial risk of loss. These are the Italian definitions of sofferenza
and incaglio.7 Since 2014, non-performing exposures follow the European Banking
Authority classification: banks must classify exposures as non-performing, whether or not
they are backed by collateral or guarantees, when they deem the debtors unable to repay
them in full (the unlikely to pay criterion), regardless of whether there are unpaid past-due
amounts, or when they are more than 90 days past-due and their amount is significant
according to the criteria established at national level. The unlikely to pay criterion modify
the Italian definition of substandard loans, harmonizing it at the European level.8
To test the hypothesis presented in Section (2), we select a comprehensive set of explanatory variables, divided in four main categories. The macroeconomic environment is
also considered with specific indicators. The first category reviews credit risk and capital
management. NPL / Assets captures non-performing loans defined as the sum of 90+
days past-due substandard and doubtful loans. We expect a positive relation with LLP,
general and specific reserves. NCO / Assets is the ratio between net charge-offs and total
assets. The numerator represents the true banks credit cost as the difference between total
charge-offs and recoveries, therefore covering the entire credit risk history of a loan (Golin
and Delhaise, 2013). Accordingly, we expect a positive relation with provisioning, but the
sign is uncertain for reserves. NPL coverage ratio is the ratio of loan loss reserves over
the amount of impaired loans: it is a non-discretionary component of LLP, as suggested
by Fonseca and Gonz
alez (2008), and measures the historical perception of credit risk
for loans. Equity / Assets reflects the banks capital structure and represents a cushion
against asset malfunctions, while the capital adequacy ratio, i.e. Tier 1 + Tier 2 capital
/ Risk weighted assets, controls the potential use of capital management for regulatory
purposes. According to the capital management hypothesis, we expect a negative relation
with provisioning and bad loans.9
The second category reflects banks earnings management and efficiency. EBTLLP /
Assets is the ratio of earnings before taxes and LLP weighted by total assets. It could be
interpreted as a proxy for income-smoothing: a positive relation between income and provisions/reserves would reveal that banks, on average, increase their concern on credit risk
7
According to Bank of Italy Circular 272/2008, before the 7th update (i.e. pre Implementing Technical
Standards), doubtful loans are defined as the total exposure to insolvent borrowers, those globally unable
to cover financial obligations and not expected to recover, even if it does not necessarily result in legally
ascertained bankruptcy. Substandard loans are exposures to borrowers in significant financial difficulty,
based on objective factors, that can recover in a reasonable period of time.
8
Moreover, the EBA (2014) document introduces the category of forbearance, which includes exposures on which concessions have been granted in view of the debtors financial difficulties.
9
See Ahmed et al. (1999) and Fonseca and Gonz
alez (2008), Bikker and Metzmakers (2005) and Louzis
et al. (2010) for LLP, loan loss reserves and bad loans, respectively.

when earnings are higher. ROAA and Recurring Earning Power are other two measures of
profitability: the first one measures return on average assets financed by the bank, while
the second resembles EBTLLP, but with minor differences.10 Finally, we also include the
cost-income ratio as an inverse measure of bank efficiency.
The third category of explanatory variables involves the asset side: % Loans, Net
Loans / Assets and Size represent the growth rate of loans, the importance of net loans
in the banks asset portfolio, and the banks size, as the natural logarithm of total assets,
respectively. As suggested by Balla and Rose (2015), the growth rate of loans could
be negatively or positively associated with provisions, depending on the quality of the
new loans. It could also be interpreted as a proxy for increased credit risk (Bikker and
Metzemakers, 2005). We expect a positive impact on provisioning and non-performing
exposures from the ratio of net loans and size.
In order to consider the fragility of the banking sector, the liquidity position of a
bank and the degree of banking competition during the crisis, we define a fourth category
of variables. The capital impairment ratio is the ratio between the impaired loans not
covered by reserves and equity: it therefore measures the weakness of the capital ratio
against loan losses. We expect a negative sign related to reserves management. The ratio
of liquid assets to customers and short term funds reflects the vulnerability of the bank to
a liquidity shock; moreover, we also take care of the competitiveness of the banking sector
by using the Herfindal-Hirschman index. Finally, we consider the default risk of the bank
by using the Z-score indicator, as suggested for example by Anginer and Dermirg
uc-Kunt
11
(2011) and Dermirg
uc-Kunt and Detragiache (2010), among others.
The macroeconomic environment is described by three variables: the output gap,
collected from OECD, defined as deviations of actual GDP from potential GDP, as %
of potential GDP; the unemployment rate, from OECD, related to all persons aged 15-64;
the credit / GDP ratio, from World Bank, calculated as the domestic credit to private
sector, as % of GDP.12
All micro variables are winsorized at the 1% and 99% levels, as in Domikowsky et
al. (2014). This is a conventional approach in banking and corporate finance literature
(Cameron and Trivedi, 2009), and we choose these percentiles due to possible large outliers
during the period analyzed.
Figure (1) shows the dynamics of the dependent variables, together with the ratio of
non-performing loans (NPL) over total assets. The pattern is rather similar for all types
of banks, even if with few peculiarities: the five largest banks, from 2007 to 2009, reduced
doubtful loans together with generic and specific reserves, while amplifying provisioning
10

See Bankscope (2015) for definitions

Results from preliminary estimates confirm that the liquidity indicator and the Herfindal-Hirschman
index are not statistically significant. Therefore, we have decided to not report estimation results.
12
We do not consider real GDP growth among the macroeconomic variables because of its uncertain
time series properties (i.e. correlations and impulse response functions), especially during the last financial
crisis. See Bofondi and Ropele (2011) and more recently Carboni and Carboni (2014). Results from
preliminary estimates confirm that real GDP growth is not statistically significant.
11

for loan losses and NPL; substandard loans are decreasing for savings and cooperative
banks until 2012; the ratio of NPL to total assets for the 5 largest banks is twice as the
ratio for cooperative banks from 2012 to 2014; general reserves remain relatively stable
for mutual banks. Possible reasons for this evidence could derive from different credit risk
management practices (standard vs internal rating based models), the availability and
access to an efficient securitization of non-performing assets (especially for the 5 largest
banks), different capital management policies (see Italian banking law (2015) on mutual
banks constraints) and relationship lending (cooperative and savings banks vs commercial
banks). Figure (1) also suggests a further weakening in credit portfolios since 2011: this
evidence seems support the empirical results of Carboni and Carboni (2014) who find a
change in credit risk regime (deterioration) in 2010Q3 through a regime-switching analysis
of Italian bad loans.
Table (2) to (6) present summary statistics for the entire banking system and for different types of banks. We have decided to consider the Italian definition of cooperative
banks.13 Some interesting points emerge. First, the assets range confirms the degree of
broad heterogeneity of the Italian banking system. Second, general and specific reserves,
together with doubtful and substandard loans, for small cooperative banks, present extremely volatile values. These are also the banks with the highest stock of risky loans.14
Third, the values of NPL coverage ratio are above 50% for commercial and savings banks,
while they are particularly low for cooperative banks, supporting the severe riskiness of
their loan portfolios. Fourth, lending growth rates and the liquid asset-to-funding ratios
are low for mutual and savings banks, showing different lending and asset management
policies. Finally, higher z-scores for cooperative banks, relative to z-scores for other type
of banks show that small banks seem more solvent and less risky than large banks.

Econometric methodology

An empirical study of credit risk management through the assessment of creditworthiness

and subsequent provisioning policies requires the assumption of a gradual banks behavior
during the entire process. Laeven and Majnoni (2003), Bikker and Metzemakers (2005),
Fonseca and Gonz
alez (2008), among others, and more recently Domikowsky et al. (2014)
and Balla and Rose (2015) recognize this behavior and propose dynamic panel data models
for the study of provisioning, while Louzis et al. (2010) and Klein (2013) among others
13

The Table of descriptive statistics for the Bankscope definition of cooperative banks is available from
the author upon request.
14
Cooperative banks have been subject to reforms primarily to deal with prudential regulation and to
take care of their particular role in assistance of customers like families and micro firms. On the other hand,
the need for high quality capital must be satisfied through direct access to markets. Moreover, the stock of
non-performing loans should be taken into account: see for example, Jassaud and Kang (2015) and more
recently Bank of Italy (various issues of financial stability reports) for the role of an asset management
company to alleviate weaknesses in banks balance sheets and to revitalize the market for non-performing
assets.

develop similar estimation techniques to study the determinants of non-performing loans.15

We apply the (two-step system) generalized-method-of-moments (GMM) estimation
technique developed by Blundell and Bond (1998), with Windmeijer (2005) correction for
standard errors. According to Cameron and Trivedi (2005, 2009) and Roodman (2009),
this estimator is designed for small T, large N panels with unobserved (bank-specific)
fixed effects. In addition, dynamic properties are useful during financial crisis for the
behavior of LLP, reserves and problem loans. Finally, the issue of endogeneity of the explanatory variables is taken into account.16 To mitigate this problem, we use a limited set
of instruments based on lagged values for some of the variables involved in the regressions.
We divide instruments in two categories: IV-style instruments, which collect strictly exogenous regressors, in our case the macroeconomic variables, and GMM-style instruments,
which include both predetermined and endogenous variables, the selected list of banking
instruments. We test the validity of the models with two specifications tests. The first is
the Arellano and Bond (1991) autocorrelation test for first differenced errors, according to
which the model should exhibit first order serial correlation, due to first differences, but
should have no sign of higher order correlations. The second is the Hansen test for overidentifying restrictions proposed by Blundell and Bond (1998). Finally, following Roodman
(2009) and Baum et al. (2003), we also perform the difference-in-Hansen test to test the
validity of either two categories of instruments.17
The following equations illustrate the estimated baseline models:
(LLP/Assets)i,t = 1 (LLP/Assets)i,t1 + 2 (LLP/Assets)i,t2
+ 3 (Risk and Capital)i,t + 4 (Earnings)i,t
+ 5 (Asset structure)i,t + 6 (Liquidty and Solvency)i,t
2014
X

+ 7 (M acro)i,t + 8

(1)

Tt + i + i,t

t=2007

(Reserves/Assets)i,t = 1 (Reserves/Assets)i,t1 + 2 (Reserves/Assets)i,t2

+ 3 (Risk and Capital)i,t + 4 (Earnings)i,t
+ 5 (Asset structure)i,t + 6 (Liquidty and Solvency)i,t
+ 7 (M acro)i,t + 8

2014
X

(2)

Tt + i + i,t

t=2007
15
A very recent paper written by Homar et al. (2015) analyzes the drivers of forbearance using the
results of the asset quality review. For a survey on bad loans see Carboni and Carboni (2014).
16
See also Roberts and Whited (2011) for the problem of endogeneity in corporate finance.
17
The statistic is defined as the difference between the Hansen statistic of the equation with the smaller
set of instruments (valid under both the null and alternative hypotheses) and the equation with the
full set of instruments. Under the null hypothesis that both the smaller set of instruments and the
additional, suspect instruments are valid, the statistic is distributed as chi-squared in the number of
excluded instruments tested.

10

(90 + Loans/Assets)i,t = 1 (90 + Loans/Assets)i,t1 + 2 (90 + Loans/Assets)i,t2

+ 3 (Risk and Capital)i,t + 4 (Earnings)i,t
+ 5 (Asset structure)i,t + 6 (Liquidty and Solvency)i,t
+ 7 (Reserves)i,t + 8 (M acro)i,t + 9

2014
X

Tt + i + i,t .

t=2007

(3)
The first two lags of the dependent variables are included to take account of the speed
of adjustment beyond the first year (banking perspective) and ensure consistency (econometric perspective). The explanatory variables, defined in Section (??), are included with
appropriate lags.18 We have also decided to consider time dummies to avoid correlation across individuals, as remembered by Roodman (2009). However, Domikowsky et al.
(2014) suggest that time dummies could also capture cyclical effects of LLP, distorting
the estimates of macro variables. In Section (6), we remove them in robustness exercises
and we obtain an improvement in the significance for the macro variables. Finally, the
inclusion of i captures unobservable bank-specific effects that are constant over time, but
vary across banks, while i,t is the white-noise error term.

Results

5.1

LLP

In this Section we model LLP with different specifications. To mitigate the problem of
potential endogeneity, we use two-to-four period lags for the LLP / Assets, NPL / Assets
and NCO / Assets.19
Table (7) reports estimation results for the baseline specifications for loan loss provisions. The first lag of the dependent variable has a positive expected coefficient, indicating that the dynamic specification to model bank provisioning is correct. Provisioning
responds positively to credit risk variables: the higher the stock of NPL and NCO during
the reporting period, the more concerned a bank is about probable loan losses in credit
portfolio, and therefore, the higher is the provision. On the other hand, the negative
18

Correlation tables, not reported, but available upon request, confirm the theoretical signs suggested
by the hypothesis. However, we tested the model for influences caused by collinearity using these steps.
First, we regress the two lags of the dependent variables and macroeconomic variables, and then save
residuals. Second, we regress each of the other variables on previous residuals, with unchanged values and
significance for all coefficients. We also perform the VIF test for our regressions, without obtaining clear
sign of multicollinearity.
19
Estimation results with a different set of instruments (all available lags of the dependent variable and
different banking variables and lags) do not alter results significantly. Tables are available from the authors
upon request.

11

sign of Equity / Assets confirms the capital management hypothesis for this model, although the capital adequacy ratio enters without significance. The earnings management
hypothesis is also supported, with the EBTLLP / Assets displaying positive coefficients,
confirming that banks undertake income smoothing (provision moves with income) during
crisis. Results are corroborated by the positive sign of recurring earning power and by
the negative sign of ROAA, as a performance indicator for general assets. The positive
coefficients for the first lagged value of Net loans / Assets reflect an increasing concern for
higher credit risk during the crisis, while the negative signs for cost-income ratio and size,
although only in one specification, seem support the fact that provisioning is positively
related to cost efficiency, but negatively with the banks dimension. Results are in line of
what Bikker and Metzemakers (2005) found for Italy, even if the sample period considered
is different. Finally, the bottom part of Table (7) confirms the consistency of our models
in terms of autocorrelation of residuals and correct instruments.

5.2

Loan loss reserves

Although provisioning reflects the need to take account of expected losses in every reporting period, it could also be appropriate to evaluate how the accumulation of provisions
is affected by the same managerial decisions, i.e. income smoothing and capital management, on the one hand, and by the evolution of assets, on the other. Drivers of general and
specific reserves analyzed in Equation (2) are reported in Tables (8) and (9). Moreover,
we have also considered three additional different specifications. A priori, we expect to
obtain results similar to those for LLP, but we emphasize that credit risk proxies should
have a more important role for specific reserves.
Table (8) presents results for generic reserves.20 The first point to observe is the degree
of smoothness in reserves (values above 0.7), confirming that Italian banks historically
recognize credit riskiness in their portfolios and calibrate provisions accordingly. Second,
the impact of NPL is positive and significant in almost all specifications, respecting the role
of provisions against expected loan losses. It is also confirmed by the behavior of the NPL
coverage ratio. An increase in the growth rate of loans produces a reduction in general
reserves, one year later, while a positive response when the two variables are considered at
the same time. Moreover, results show that larger banks have accumulated more reserves
against expected loan losses in their portfolios. We do not obtain a clear confirmation
of the capital management hypothesis, contrarily to the earnings management. Finally,
macroeconomic variables enter significantly and negatively only in one specification.21 The
double-dip-recession during the sample period analyzed, together with unconventional
20

We use two different sets of instruments. Two-to-four period lags of general reserves, NPL / Assets,
EBTLLP / Assets and % loans, with 82 instruments, for specifications (1) - (5). Two-to-four period lags
of general reserves, NPL / Assets, NPL coverage ratio, ROAA, EBTLLP / Assets and % loans, with 102
instruments, for (6) - (8) models.
21
General reserves react negatively to output gap / GDP: as long as the economy is far from its potential,
banks have to manage general reserves to face credit risk. General reserves also react negatively to an
increase in the credit / GDP ratio

12

monetary policies undertaken by the European Central Bank and new regulatory tools
(Basel III) could have altered the behavior of Italian banks.
Table (9) presents results for specific reserves.22 As in Domikiwsky et al. (2014)
who study the case of specific LLP for German banks, specific reserves show no sign of a
significant gradual adjustment. The impact of credit risk is coherent: the weights of NPL
/ Assets and current and lagged values of NPL coverage ratio are significantly positive and
higher with respect to general reserves. The first lag of the weight of net loans to asset has
a negative sign, confirming that Italian banks are aware about the incidence of problem
loans into their portfolios. The positive impact of the dimension proxy seems confirm
that large banks have accumulated specific reserves, i.e. that they behave prudently,
during the financial crisis. Contrary to what we have found for generic reserves, the
capital management hypothesis is confirmed, although only in one specification. On the
other hand, the earnings management hypothesis and the reaction to the macroeconomic
environment are not captured by our results. Finally, the capital impairment ratio shows
a negative sign: an uncontrollable amount of bad loans in Italian banks is not adequately
covered by specific reserves, amplifying the vulnerability of bank capital.

5.3

Doubtful and substandard loans

Table (10) describes the estimates of Equation (3) for doubtful and substandard loans.23
According to the literature, we include lagged determinants for credit risk variables, profitability and capital, while the current value for assets and efficiency. We also consider
the macroeconomic environment with one year lag. Moreover, to retain consistency, twoto-four-period lags of the dependent variable, the growth rate of loans and the specific
(general) reserves are used as instruments for doubtful (substandard) loans.
Non-performing loans denote a similar high degree of positive persistence, reflecting
the worsening in credit markets. The one year lagged value of the Equity / Assets enters
with a negative sign only for substandard loans: the more capitalized a bank is, the lower
is the stock of substandard loans. In addition, an increase in the regulatory ratio produce
a negative (positive) reaction in doubtful (substandard) loans. This finding validates the
moral hazard hypothesis of Berger and DeYoung (1997) for substandard loans. Moreover, the first lag of generic and specific reserves enters with a positive and significant sign.
For the profitability and efficiency, estimates point toward two different results. Doubtful
loans are negatively affected by the average return assets and positively by a reduction in
efficiency. On the other hand, an increase in efficiency (measured by a lower cost-income
ratio) reduces substandard loans, supporting skimping and bad management hypothesis described by Berger and DeYoung (1997). The variables on the asset side show that
22
We use two-to-four period lags of specific reserves and NCO / Assets, with 42 instruments for all
specifications.
23
In Carboni and Carboni (2014) we use a similar model for the ratio of bad loans over total loans, with
a different sample period. Preliminary analysis confirms that using either one of the two ratios does not
affect the results significantly.

13

only the bank dimension is significant: positive for doubtful but negative for substandard
loans. Finally, we obtain a positive reaction to an increase in the capital impairment ratio,
but no significant influences from the macroeconomic environment.

5.4

Bank types

Up to now, our analysis has been conducted on the entire panel of banks. However, given
the heterogeneity of the Italian banking system (between and within banks with the same
legal status) we have decided to repeat the exercise on different types of institutions. Following the rationale of Bank of Italy (various issues of financial stability reports), we split
our panel according to the distribution of total assets, in three categories: 1) small banks,
with an amount of total assets below the 50%-th percentile of the distribution; 2) medium
banks, with total assets above the 50%-th percentile but below the 90%-th percentile; 3)
large banks, with total assets above the 90%-th percentile of the distribution.24 Moreover,
we include the cooperative sector to complete the analysis. The instrumental variable
sets are the same for all banks, except for the large category where we use appropriate
instruments, due to the small number of observations.25
5.4.1

LLP

Table (11) presents results for all types of banks. The stock of NPL over total assets
contributes positively to provisioning, although medium banks seem more reactive. The
NCO ratio enters positively for cooperative and large banks, with greater emphasis in the
latter category. Looking at the capital management hypothesis, cooperative and small
banks experience a negative reaction of provisioning against Equity / Assets, even if there
is sign of a positive reaction for medium banks, validating this hypothesis only for banks
with small dimension. Regarding the earnings management, large banks do not achieve an
adequate income smoothing during the financial crisis. This result can be interpreted with
caution given the low number of banks in the sample, but this is an important point in
our analysis. The other profitability indicator (recurring earning power) corroborates this
evidence. The estimates confirm that size enters positively only for medium banks, while
the weight of net loans on the banks asset portfolio is positive for larger banks. Finally,
provisioning shows a different reaction to macroeconomic environment. More specifically,
an increase in the output gap involves positive provisions for medium banks, while the
24

In the selection process, we have encountered only a small number of banks belonging to two categories
during the time period considered. We put banks in a specified category when that category persists for
the majority of the period.
25
For LLP models, large banks are specified with this instrument set: two-to-four period lags of LLP /
Assets and NPL / Assets. For general reserves: two-to-four period lags of general reserves / Assets and
NPL / Assets. For specific reserves: two-to-four period lags of specific reserves / Assets and NCO / Assets.
For doubtful loans: two-to-four period lags of doubtful loans / Assets and % loans. For substandard
loans: two-to-six period lags of doubtful loans / Assets.

14

opposite holds for large banks. Results also indicate a negative reaction to the ratio of
credit / GDP only for medium banks.
5.4.2

Reserves

To save space, we do not report results for general and specific reserves.26 General reserves
show positive persistence for all banks, especially for medium sized banks. As expected,
impaired loans cause a positive reaction in general reserves, for all banks, with greater
sensitivity for large banks. However, small banks do not follow this pattern. Although
we do not find evidence in favor of the capital management hypothesis, the procedure of
income smoothing with non-discretionary funds is only a medium bank sized peculiarity.
When ROAA is taken into account, income smoothing is also extended to cooperative
banks, with a negative reaction in general reserves. On the other hand, the growth rate
of loans enters positively, for all type of banks, expect for the largest. Moreover, size
is positive and statistically significant for cooperative and for large banks, as expected.
General reserves in cooperative banks respond positively to the solvency indicator, proxied
by the z-score: higher solvency reflects a more prudent bank about expected credit risk.
Finally, the stance of the economy is meaningful especially for larger banks.
Contrarily to what we have found before for specific reserves, the estimations conducted on different bank types capture persistence during financial crisis. Results reflect
appropriate prudential behaviors: the positive impact against current values of impaired
loans is also corroborated by positive coefficients of the NPL coverage ratio. The capital
management hypothesis is only confirmed for cooperative and small banks, with a negative
reaction of reserves to an upward movement in Equity / Assets. The positive weight of
non-discretionary income is captured only for medium banks and, on the other hand, results say that higher net loans cause reduction in the specific reserves one year later. This
evidence holds only for small banks, in line with previous findings for the entire panel. The
sign of the solvency of cooperative and small banks is also validated for specific reserves.
Finally, we find a negative reaction after an increase in the current output gap, but only
for large banks, with an opposite reaction with respect to general reserves.
5.4.3

Doubtful and substandard loans

The analysis conducted on different types of banks suggests that doubtful loans are particularly persistent, especially for cooperative and small banks:27 the more prudent a
cooperative bank is, the less future doubtful loans has, as suggested by the negative sign
of the capital adequacy ratio. The negative impact of ROAA seems support the bad management II hypothesis, studied in Louzis et al. (2010), by which past bad performance is
positively associated with higher future bad loans. On the other hand, for assets, proxied
by current growth rate of loans and size, an increase in the amount of loans suggests a
26
27

They are available from the authors upon request.

To save space, we do not report results. Tables with all information are available from the authors.

15

reduction in doubtful loans. This holds only for small banks. The solvency indicator, represented by the current capital impairment ratio, has a positive and significant influence
for doubtful loans, which is valid among all types of banks.
Substandard loans, the riskiest category of non-performing loans, also show persistence
for all banks, while only for medium banks the Equity / Assets ratio reduces future bad
loans. Moreover, the cost-income ratio enters with the negative sign, supporting the
hypothesis of Berger and DeYoung (1997). Even for this category of loans, the capital
impairment ratio has a positive and significant coefficient across all bank types. Finally,
the macroeconomic variables, expressed with their first lag, denote a negative movement
for substandard loans in the case of unemployment rate and output gap, while a positive
for the credit / GDP ratio. The consistency of our estimates is confirmed by the Arellano
and Bond (1991) test and by the Hansen overidentification test, for the validity of the
instrument set for all types of banks, excluding the largest, where we found signs of
autocorrelation in residuals.

Robustness

6.1

Arellano and Bond estimation

The first robustness exercise consists in the application of the difference-GMM methodology developed by Arellano and Bond (1991). According to Cameron and Trivedi (2009),
this method addresses the same issues as the ones proposed by Blundell and Bond (1998),
but has a lower precision in samples with a limited time dimension and higher persistence.28 On the other hand, the application of fixed-effects model, confirmed by the
Hausman test against a random effect model, is not adequate for our small T, large N
panel. Although simple and intuitive, it may give rise to dynamic panel bias, resultant
from endogeneity of the lagged dependent variable and fixed effects in the error term.
We have decided to describe results without reporting tables. They are available from
the authors upon request. Estimates for the LLP model produce a less persistent provisioning in both years, confirming the flaws about the econometric methodology. However,
results validate our findings for the reaction of LLP to an increase in the stock of bad
loans. Moreover, we find evidence of the capital management hypothesis, with a negative
reaction of provisioning to an increase in Equity / Assets and in the capital adequacy
ratio. In all specifications considered, we obtain that all measures of earnings enter with
the expected sign. The impact of the economy is also considered, with a negative sign for
output gap and credit / GDP.
General and specific reserves present low persistence with respect to previous results.
Credit risk indicators are significant only for specific reserves, suited to cover specific losses:
the response is positive for the stock of NPL and for the NPL coverage ratio. Even the
capital management hypothesis is valid for specific reserves. On the other hand, earnings
28

See Blundell and Bond (1998) for further comments on the performance of different GMM estimator.

16

management is confirmed for general reserves: EBTLLP, ROAA and cost-income ratio
enter with appropriate signs.
Finally, for doubtful and substandard loans the capital adequacy ratio and the first
lagged value of general reserves enter positively, confirming the moral hazard , suggested
by Berger and DeYoung (1997), Louzis et al, (2010) and more recently by Carboni and
Carboni (2014). Moreover, the bad management II hypothesis is also validated, with
negative sensitivity of substandard loans after good performance.

6.2

Time dummies

Do time dummies capture cyclical effects for LLP and other dependent variables, distorting
the estimates of macro and possibly other variables?29 This is what Domikowsky et
al. (2014) suspected in their analysis of loan loss provisioning in Germany, which was
developed without time dummies. In order to shed light on this aspect, we remove them
and we re-estimate our baseline models for LLP, reserves and non-performing loans. Some
points emerge. First, significance is improved for all coefficients, allowing us to support
the underlying hypothesis more firmly. Second, both current and past macroeconomic
variables enter with a significant expected sign: the output gap causes a negative (positive)
reaction of provisions (reserves and non-performing loans); a change in credit / GDP
increases LLPs and substandard loans, but reduces specific reserves. Finally, doubtful
loans respond to unemployment rate. Although our results seem quite promising, the
Hansen test rejects the appropriateness of instruments in few cases. Moreover, we think
that during a turbulent period, like the one analyzed, the inclusion of time dummies is
necessary to take care of time series properties of the data, also considering the warning
of Roodman (2009). In light of these reflections, we can say: Yes, time dummies capture
cyclical effects, especially for LLP, but we use them because they produce more consistent
results.

Extensions

7.1

Interactions for LLPs

This Section explores whether the hypothesis for LLP change due to weaknesses in credit
risk management, represented by severe problems in credit quality and insufficient ability
to cover losses. We follow Golin and Delhaise (2013) in defining dummies for values of
NPL / Gross Loans higher than 10% and for Loans Loss Reserves / Gross Loans lower
than 50%. Moreover, suitable interaction terms are added to the baseline specification, in
order to understand how the underlying hypothesis change accordingly. The new model
is:
29

During preliminary analysis we substitute current macroeconomic variables with their one year lag.
Regression results do not change significantly. Tables are available from the author upon request.

17

(LLP/Assets)i,t = 1 (LLP/Assets)i,t1 + 2 (LLP/Assets)i,t2

+ 3 (Risk and Capital)i,t + 4 (Earnings)i,t
+ 5 (Asset structure)i,t + 6 (Solvency)i,t
+ 7 (M acro)i,t + 8

2014
X

(4)

Tt

t=2007

+ 9 (Interaction)i,t + 10 I (Credit Risk) + i + i,t ,

where Interaction is alternatively, (EBTLLP / Assets), (NCO / Assets), (Equity /
Assets) multiplied by I(Credit Risk), and I(Credit Risk) are dummy variables that equal
1 if conditions are valid, and zero otherwise. Table (12) presents only results for dummies
and interaction terms. The evidence supports the view that banks with weaknesses in
credit risk practices have insufficient provisioning. Interaction terms for EBTLLP and
Recurring Earning Power demonstrate that a riskier bank needs more non-discretionary
income to manage provisions. Moreover, when a bank has insufficient reserves to cover
losses, it is unable to assess the true credit cost from losses, with a resultant reduction
in provisions. The relation between the Equity / Assets and provisions is also affected:
results contrast with the evidence that less capitalized banks should have higher provisions.

7.2

The impact of 2011-2012 unconventional measures

The path of different profitability indexes, depicted in Figure (2), conceals an empirical
fact that draws our attention: a decreasing pattern until 2010, two periods of recovery
in 2011 and 2012, and then a new reduction in 2013. On the macroeconomic side, the
real GDP growth turns positive in 2010 and 2011, while the unemployment rate remained
steady at 8.5%. Moreover, the growth rate of loans have a slowdown in 2011 and in 2012,
while in 2013 it turns negative. During 2011 - 2012, the European Central Bank undertook
some unconventional measures in the form of quantitative easing and a round of long-term
refinancing operations (LTROs), launched on December 2011, to support bank lending and
money market activity. This list of policies, together with the situation in loans market,
allows us to pose this question: How do banks accumulate loan loss provisions and
manage reserves at the beginning of the crisis and after the implementation of 2011 - 2012
unconventional policies? Do banks take advantage from LTROs?.
In order to analyze this behavior before and after the ECB (2011) LTROs program,
the last exercise develops a difference-in-difference approach for the first of our baseline
models. We re-estimate Equations (1) and (2) for two different periods (2007 - 2008) and
alternatively (2011 - 2012) or (2012 - 2013) and then compare coefficient results.30 To
30

The estimation of non-performing exposures with a difference-in-difference approach requires an identification strategy for borrowers and lenders, which is impossible with our dataset. We refer to the study of
Bonaccorsi di Patti and Sette (2012) for an application of this methodology to the Italian banking sector.

18

minimize the problem of potential endogeneity, dependent variables are chosen one year
later and all regressions have heteroskedastic consistent standard errors. We expect an
increase in the coefficients of EBTLLP / Assets and a reduction in the coefficients for the
growth rate of loans after the ECB measures. The first is a sign of a higher influence of
non-discretionary income during ECB intervention, against the rationale of unconventional
(credit oriented) measures, while the other could be a sign of the functioning of those policies, with a consequent perception of a better quality in loans. Results provided in Table
(12) seem confirm our hypothesis for the periods considered, where provisions and specific
reserves are more reactive to an increase in the non-discretionary component in 2012 and
2013. Moreover, the coefficient of the growth rate of loans enters with the expected negative pattern, but without significance (except for two cases, one positive and the other
negative), violating the rationale of unconventional measures. The empirical evidence also
confirms the hypothesis related to credit risk and capital management. Although results
seem promising, we are aware that our analysis lacks some essential points: a dataset with
more frequent observations, a detailed dataset of available eligible collaterals and specific
information about the evolution of loans portfolio. In light of these reflections, further
analysis is required to reach a firm conclusion about the relation between provisions and
unconventional measures, but we will elaborate this aspect in future research.

19

Concluding Remarks

Even if the Italian economy is on a path to recovery, with increasing demand for new
loans by households and firms, the stock of non-performing loans in proportion to total
assets is still unacceptably high. Coverage ratios remain stable, but at an insufficient
level. Banks with higher non-performing exposures, which tend to be less profitable, have
relatively weaker capital buffers, higher funding costs and tend to lend less (Aiyar et al.,
2015). Reducing problem loans is crucial to support credit growth and to restore the bank
lending channel, even if the link between non-performing exposures and provisioning is
not yet fully understood, especially during the financial crisis.
Our study provides evidence on the hypothesis behind the management of credit risk
provisions (LLP and reserves) and non-performing exposures (doubtful and substandard
loans) during the financial crisis. Using a sample of 500 Italian banks over the period
2007 - 2014, our paper tests the hypothesis on the entire banking system and on different
types of banks, clustered on dimension. In addition, we concentrate on the behavior of
banks with low coverage ratio and high stock of non-performing exposures, and offer an
interpretation of higher provisions during recent episodes of unconventional measures. We
summarize our main results in these points. First, provisions of Italian banks support the
earnings management and the capital management hypothesis, reflecting their procyclicality. Second, the evidence shows that banks with different dimensions do not have the same
sensitivity. In particular, macroeconomic variables affect provisioning only for medium and
large banks, the capital management hypothesis holds for cooperative and small banks,
while the earnings management is not validated for large banks. Third, non-performing
loans are highly persistent for cooperative and small banks, while the hypothesis regarding efficiency, profitability and risk-taking are confirmed when tested for non-performing
loans. Results are robust to various model specifications. Fourth, we also observe that
banks with weaknesses in credit risk practices have insufficient provisions, and therefore
need more non-discretionary income to enlarge their coverage capacity. They also increase
provisions after an increase in capital, contrarily to what capital management hypothesis
states. Finally, results show increasing sensitivity of provisions to earnings in 2011 - 2013,
due to unconventional measures: even if we are not testing the effects on bank lending,
we find that these measures have improved provisioning through earnings.

20

References
[1] Ahmed, A. S., C. Takeda, and S. Thomas, 1999), Bank loan loss provisions: A reexamination of capital management, earnings management and signaling effects, Journal
of Accounting and Economics, Vol. 28, pp. 1 - 25.
[2] Albertazzi, U. and D. J. Marchetti, 2010, Credit supply, flight to quality and
evergreening- an analysis of bank-firm relationships after Lehman, Bank of Italy working paper, No.756.
[3] Anginer, D. and A. Demirg
uc-Kunt, 2011, Has the Global Banking System become
more Fragile Over Time, Policy Research Working Paper, 5849, The World Bank.
[4] Arellano, M. and S., Bond, 1991, Some tests of specification for panel data: Monte
Carlo evidence and an application to employment equations, Review of Economic Studies, No. 58, pp. 277- 297.
[5] Asea, P. K. and S. B. Blomberg, 1997, Lending Cycles, NBER Working Paper, No.
5951.
[6] Ayar, S., W. Bergthaler, J. Garrido, A. Ilyna, A. Jobst, K. Kang, D. Kovtun, Y.
Liu, D. Monaghan and M. Moretti, 2015, A Strategy for Resolving Europes Problem
Loans, IMF Staff Discussion Note, No. 15/19.
[7] Balla E. and M. J. Rose, 2015, Loan loss provisions, accounting constraints, and bank
ownership structure, Journal of Economics and Business, Vol. 78, pp. 92 - 117.
[8] Bank of Italy, Financial Stability Report. Various issues.
[9] Bank of Italy, Matrice dei Conti, Circolare 272 del 30 luglio 2008.
[10] Bank of Italy, 2013, The recent Asset Quality Review on Non-Performing Loans
conducted by the Bank of Italy: Main Features.
[11] Bank of Italy, 2015, Note di Stabilit`a Finanziaria e Vigilanza, No.2.
[12] Bankscope, 2015, Ratio Definitions, Bureau van Dijk, Fitch IBCA.
[13] Barbagallo, C., 2015, Intervento al Seminario istituzionale sulle tematiche relative
alla riforma del settore delle banche di credito cooperativo.
[14] Barth, J.R., G. Caprio and R. Levine, 2004, Bank regulation and supervision: What
works best?, Journal of Financial Intermediation, Vol. 13, pp. 205 - 248.
[15] Baum, C. F., M. E. Schaffer and S. Stillman, 2003, Instrumental variables and GMM:
Estimation and testing, The Stata Journal, 3, No. 1, pp. 1 - 31.

21

[16] Beatty, A., S. L. Chamberlain, and J. Magliolo, 1995, Managing Financial Reports of
Commercial Banks: The Influence of Taxes, Regulatory Capital, and Earnings, Journal
of Accounting Research, Vol. 33, pp. 231 - 261.
[17] Beatty, A. and S. Liao, 2011, Do delays in expected loss recognition affect banks
willingness to lend?, Journal of Accounting and Economics, Vol. 52, pp. 1 - 20.
[18] Berger, A. N. and R. DeYoung, 1997, Problem Loans and Cost Efficiency in Commercial Banks, Journal of Banking and Finance, Vol. 21.
[19] Bergthaler, W., K. Kang, Y. Liu and D. Monaghan, 2015, Tackling small and medium
sized enterprise problem loans in Europe, IMF Staff Discussion Note, 15/04, March
2015.
[20] Bikker, J. A. and P. A. J. Metzemakers, 2005, Bank provisioning behaviour and
procyclicality, Journal of Banking and Finance, Vol. 15(2), pp. 141 - 157.
[21] Blundell, R. and S. Bond, 1998, Initial conditions and moment restrictions in dynamic
panel data models, Journal of Econometrics, 87, pp. 115 - 143.
[22] Bofondi, M. and T. Ropele, 2011, Macroeconomic Determinants of Bad Loans: Evidence from Italian banks, Bank of Italy Occasional Papers, No. 89.
[23] Bonaccorsi di Patti E. and E. Sette, 2012, Bank Balance Sheets and the Transmission
of Financial Shocks to Borrowers: Evidence from the 2007-2008 Crisis, Bank of Italy
working paper, No. 848.
[24] Borio, C., C. Furfine and P. Lowe, 2001, Procyclicality of the Financial System and
Financial Stability: Issues and Policy Options, BIS papers, No. 1.
[25] Bouvatier, V. and L. Lepetit, 2008, Banks procyclical behavior: Does provisioning
matter? International Financial Markets, Institutions, and Money, Vol. 18, pp. 513 526.
[26] Bouvatier, V., and L. Lepetit, 2012, Provisioning rules and bank lending: A theoretical model, Journal of Financial Stability, Vol. 8, pp. 25 - 31.
[27] Bushman, R. M. and C. D. Williams, 2012, Accounting discretion, loan loss provisioning, and discipline of Banks risk-taking, Journal of Accounting and Economics,
Vol. 54, pp. 1 - 18.
[28] Cameron, A. C. and P. K. Trivedi, 2005, Microeconometrics Methods and Applications, Cambridge University Press.
[29] Cameron, A. C. and P. K. Trivedi, 2009, Microeconometrics Using Stata, Stata Press,
StataCorp LP.
22

[30] Caporale, G. M., M. Alessi and J. S. Lopez, 2015, Loan Loss Provision: Some Empirical Evidence for Italian Banks, DIW discussion paper No. 1459.
[31] Carboni, A. and A. Carboni, 2014, An Analysis of Italian Bad Loans: Determinants, Forecasts and Transmission to the Real Economy. Available at:
http://papers.ssrn.com/sol3/papers.cfm?abstract id=2529122.
[32] Cavallo, M. and G. Majnoni, 2002, Do Banks Provision for Bad Loans in Good Times?
Empirical Evidence and Policy Implications. In R. Levich, C. Reinhart, and G. Majnoni
(Eds.), Ratings, Rating Agencies and the Global Financial System, Chapter 13, pp. 319
- 342. Kluwer Academic Publishers.
[33] Demirg
uc-Kunt, A. and E. Detragiache, 2010, Basel Core Principles and Bank
Soundness- Does Compliance Matter, IMF working paper, 10/81.
[34] Domikowsky, C., S. Bornemann, K. Duellmann and A. Pfingsten, 2014, Loan loss
provisioning and procyclicality: evidence from an expected loss model, Deutsche Bundesbank discussion paper, No. 39/2014.
[35] Duran, M. A. and A. Lozano-Vivas, 2015, Moral hazard and the financial structure
of banks, Journal of International Financial Markets, Institutions & Money, Vol. 34,
pp. 28 - 40.
[36] European Banking Authority, 2014, EBA FINAL draft Implementing Technical Standards.
[37] European Central Bank, Financial Stability Review. Various issues.
[38] European Central Bank, 2011, ECB announces measures to support bank
lending and money market activity, PRESS RELEASE, 8 December 2011.
https://www.ecb.europa.eu/press/pr/date/2011/html/pr111208 1.en.html
[39] Ferri, G., P. Kalmi and E. Kerola, 2014, Does bank ownership affect lending behavior?
Evidence from the Euro area, Journal of Banking & Finance, Vol. 48, pp. 194 - 209.
[40] Fonseca, A. R. and F. Gonz
alez, 2008, Cross-country Determinants of Bank Income
Smoothing by Managing Loan-Loss Provisions, Journal of Banking and Finance Vol.
32, pp. 217 - 228.
[41] Fudenberg, D. and J. Tirole, 1995, A Theory of Income and Dividend Smoothing
based on Incumbency Rents, Journal of Political Economy 103(1), pp. 75-93.
[42] Gambacorta, L., 2005, Inside the bank lending channel, European Economic Review,
Vol. 49, pp. 1737 - 1759.
[43] Golin, J. and P. Delhaise, 2013, The Bank Credit Analysis Handbook, Wiley Finance
Series.
23

[44] Handorf, W. C. and L. Zhu, 2006, US Bank Loan-Loss Provisions, Economic Conditions, and Regulatory Guidance, Journal of Applied Finance, Vol. 16, pp- 97 - 114.
[45] Hoggarth, G. and D. Pain, 2002, Bank provisioning: The UK experience, Financial
Stability Review, No. 1, pp. 116 - 127.
[46] Homar, T., H. Kick and C. Salleo, 2015, What Drives Forbearance - Evidence from
the ECB Comprehensive Assessment, ECB working paper, No. 1860, October.
[47] Jassaud, N. and K. Kang, 2015, A Strategy for Developing a Market for Nonperforming Loans in Italy, IMF working paper, No. 15/24.
[48] W. R. Keeton , 1999, Does Faster Loan Growth Lead to Higher Loan Losses?, Federal
Reserve Bank of Kansas City, Economic Review, second quarter.
[49] Klein, N., 2013, Non-Performing Loans in CESEE: Determinants and Impact on
Macroeconomic Performance, IMF working paper, No. 13/72.
[50] Laeven, L. and G. Majnoni, 2003, Loan loss provisioning and economic slowdowns:
Too much, too late?, Journal of Financial Intermediation, Vol. 12, pp. 178 - 197.
[51] Lobo, G. J. and D. H. Yang, 2001, Bank Managers Heterogeneous Decisions on
Discretionary Loan Loss Provisions, Review of Quantitative Finance and Accounting,
Vol. 16(3), pp. 223 - 250.
[52] Louzis, D.P., A.T. Voludis and V.L. Metaxas, 2010, Macroeconomic and banking specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios, Bank of Greece working paper, No. 118.
[53] Nkusu, M., 2011, Nonperforming Loans and Macrofinancial Vulnerabilities in Advanced Economies, IMF working paper, No. 11/161.
[54] Perez, D., J. Saurina, and V. Salas-Fumas, 2008, Earnings and Capital Management
in Alternative Loan Loss Provision Regulatory Regimes, European Accounting Review,
Vol. 17, pp. 423 - 445.
[55] Roberts, M. R. and T. M. Whited, 2011, Endogeneity in Empirical Corporate Finance,The Bradley Policy Research Center Financial Research and Policy Working
Paper, No. FR 11-29. Available at: http://ssrn.com/abstract=1748604
[56] Roodman, D., 2009, How to do xtabond2: An introduction to difference and system
GMM in Stata, The Stata Journal, Vol. 9, No. 1, pp. 86 - 136.
[57] Salas, V. and J. Saurina, 2002, Credit Risk in Two Institutional Regimes: Spanish
Commercial and Savings Banks, Journal of Financial Services Research, 22:3, pp. 203
- 224.
24

[58] Shrieves, R. E. and D. Dahl, 2003, Discretionary accounting and the behavior of
Japanese banks under financial duress, Journal of Banking and Finance, Vol. 27, pp.
1219 - 1243.
[59] Testo Unico Bancario, 2015, Versione aggiornata al decreto legislativo 12 maggio 2015,
n. 72.
[60] Wall, L. D. and T. W. Koch, 2000, Bank Loan-Loss Accounting: A Review of Theoretical and Empirical Evidence, Economic Review, Vol. 85, pp. 1 - 18.
[61] Windmeijer, F., 2005, A finite sample correction for the variance of linear efficient
two-step GMM estimators, Journal of Econometrics, 126, pp. 25 - 51.

25

Figures

Box 1b: Substandard Loans / Total Assets (%)

Box 1c: NPL / Total Assets (%)

8

30

Box 1a: Doubtful Loans / Total Assets (%)

Mutual

Sav.

20

Comm.

Coop.

2008

2010

2012

2014

2006

2010

2012

2014

2006

Box 2b: Specific Reserves / Total Assets (%)

Box 2a: General Reserves / Total Assets (%)

2008

2010

2012

2014

Box 2c: LLP / Total Assets (%)

2006

2008

2010

2012

2014

.2

.5

.4

.6

.8

2008

1.5

2006

10

5 Larg.

2006

2008

2010

2012

2014

2006

2008

2010

2012

Figure 1. Credit risk management for different bank types. Sample period 2007 - 2014. 5 largest banks
are: Unicredit, Intesa Sanpaolo, Banca Monte dei Paschi di Siena, UBI Banca, Banco Popolare. Source:
Bankscope and our own calculations.

26

2014

10

1.5

10

10

1.2

1
.8

.5
0

0
5

2012

ROAA

2014

2006

LLP

2008

2010

2012

ROAE

2006

LLP

2010

2012

2014
LLP

2006

2008

2010

NII / AA
D% Loans

2012

2014
LLP

2006

2008

2010

OOI / AA
D% Loans

2012

2014
LLP

0
5

.5
0

0
5

10

1.5

D% Loans

10

2008

EBTLLP

D% Loans

10

D% Loans

2014

2010

2008

.6
.4
.2

2006

2006

2008

2010

2012

IND / AE
D% Loans

Figure 2. Median values of different profitability indicators against growth rate of loans. LLP is loan loss
provisions. ROAA is return on average assets. ROAE is return on average equity. EBTLLP is earnings
before taxes and loan loss provisions over total assets. NII / AA is net interest income over average assets.
OOI / AA is other operating income over average assets. IND / AE is income net of distribution over
average equity. D% Loans is the growth rate of loans, in right scale. Data are in percentage points. Source:
Bankscope and our own calculations.

27

2014
LLP

.015
.01

.8

.005

Coeff. of D% Loans
0
.005

Coeff. of EBTLLP / Assets

.4
.6

.01

.2
0

2008

2012

LLP

2013

2008

Gen. Res.

2012

2013

LLP

Spec. Res.

Gen. Res.

Spec. Res.

Figure 3. Coefficients comparison for the regression of LLP, general and specific reserves, before and after
the ECB measures. EBTLLP / Assets is earnings before taxes and loan loss provisions over total assets.
D% Loans is the growth rate of loans. Source: Bankscope and our own calculations.

Tables
B. Holding

Comm.

Coop.

Invest.

Priv & Asset M.

Sav.

Total

Year

No.

No.

No.

No.

No.

No.

No.

2007
2008
2009
2010
2011
2012
2013
2014

1
1
1
1
1
1
1
0

0.21
0.20
0.20
0.20
0.20
0.20
0.20
0.00

47
50
52
57
57
57
56
28

9.69
10.22
10.61
11.42
11.45
11.49
11.43
17.95

392
391
390
393
392
390
387
110

80.82
79.96
79.59
78.76
78.71
78.63
78.98
70.51

10
10
10
11
11
11
11
5

2.06
2.04
2.04
2.20
2.21
2.22
2.24
3.21

4
5
5
5
5
5
5
2

0.82
1.02
1.02
1.00
1.00
1.01
1.02
1.28

31
32
32
32
32
32
30
11

6.39
6.54
6.53
6.41
6.43
6.45
6.12
7.05

485
489
490
499
498
496
490
156

13.46
13.57
13.60
13.85
13.82
13.77
13.60
4.33

2007 - 2014
Overall

1
7

0.20
0.19

57
404

11.40
11.21

394
2845

78.80
78.96

11
79

2.20
2.19

5
36

1.00
1.00

32
232

6.40
6.44

500
3603

100.00

Table 1. Number of observations in the panel. B. Holding is bank holding companies, Comm. is commercial banks,
Coop. is cooperative banks, Invest. is investment banks, Priv & Asset M. is private banks and asset management
companies, while Sav. is savings banks. % column relative to Total section shows the share of observation by year
on the overall number of observation in the panel.

28

All banks
Variable

Obs.

Mean

Median

Std. Dev.

Max

Min

1st-pct

99th-pct

Assets mln e
LLP / Assets
Gen. Imp. Res. / Assets
Spec. Imp. Res. / Assets
Doub. Loans / Assets
Subst. Loans / Assets
NPL / Assets
Equity / Assets
NCO / Assets
Cap. Imp. Ratio
EBTLLP / Assets
% Loans
Net Loans / Assets
Size
NPL Cov. Ratio
(T1 + T2) / RWA
Cost-Income Ratio
ROAA
Rec. Ear. Pow.
Liq. Assets / Fund
HH Index
Z-Score
Output gap
Unempl. Rate
Credit / GDP

3598
3580
3430
3422
3384
3388
3418
3602
3338
3370
3580
3546
3596
3598
3431
3576
3592
3602
3602
3599
4000
3602
4000
4000
4000

7031.25
0.64
1.18
4.96
7.66
5.25
6.44
11.01
-0.94
43.22
1.19
8.81
64.67
6.46
42.41
18.25
66.26
0.41
1.23
21.03
779.42
31.67
-2.41
9.24
89.54

477.15
0.48
0.26
1.51
2.57
2.59
5.48
10.13
-0.47
32.95
1.17
4.99
67.61
6.17
37.94
15.66
65.00
0.40
1.20
14.21
864.84
27.46
-3.15
8.50
90.15

40568.12
0.67
29.35
99.11
149.96
73.12
5.60
5.20
10.36
41.93
0.76
30.66
16.68
1.73
38.58
13.24
20.92
0.81
0.85
25.05
176.27
21.90
3.21
2.33
4.42

747104.30
7.64
1083.94
3587.14
6093.57
2859.08
147.81
94.44
6.35
895.56
12.34
681.11
99.04
13.52
968.08
505.00
775.94
18.88
21.50
431.89
954.16
172.97
3.31
12.90
94.63

5.40
-0.65
0.00
0.00
0.00
0.00
0.00
1.18
-479.70
0.00
-6.23
-79.40
0.00
1.69
0.00
0.00
9.05
-5.89
-11.26
-161.93
539.42
-1.59
-6.10
6.20
82.03

35.40
-0.05
0.00
0.00
0.00
0.01
0.05
2.64
-4.04
0.34
-0.89
-15.77
7.82
3.57
3.41
8.20
30.62
-2.27
-0.65
1.83
539.42
3.36
-6.10
6.20
82.03

172961.00
3.37
1.21
10.18
13.70
11.03
21.13
26.24
0.52
183.93
2.91
95.86
92.11
12.06
142.90
61.43
120.42
2.06
3.29
117.64
954.16
103.85
3.31
12.90
94.63

Table 2. Descriptive statistics for all banks. LLP is loan loss provisions. Gen. Imp. Res. is general loan impairment
reserves. Spec. Imp. Res. is specific loan impairment reserves. Doub. Loans is doubtful loans, namely 90+ days
past due loans with substantial risk of loss. Subst. Loans is substandard loans, namely 90+ days past due loans with
unlikely repayment. NPL is impaired loans. NCO is net charge-offs. Cap. Imp. Ratio is the capital impairment
ratio calculated as Unreserved Impaired Loans / Equity. EBTLLP is earnings before taxes and loan loss provisions.
Size is the natural logarithm of total asset. NPL Cov. Ratio is the loan loss reserves / Impaired Loans ratio. (T1
+ T2) / RWA is the ratio between the sum of Tier 1 and Tier 2 capital over risk weighted assets, i.e. the capital
adequacy ratio. ROAA is the return on average assets. Rec. Ear. Pow. is the recurring earning power ratio,
calculated as the ratio between after tax profits, adding back provisions for bad debts, over total asset. Liq. Asset /
Fund is the ratio between liquid asset and customer and short-term funds, i.e. the deposit run off ratio. HH Index
is the Herfindal-Hirschman index. Z-score is calculated as: (ROAA + Equity/Asset) /ROAA . Unempl. Rate is the
unemployment rate.

29

Mutual banks
Variable

Obs.

Mean

Median

Std. dev.

Max

Min

1st-pct

99th-pct

Assets mln e
LLP / Assets
Gen. Imp. Res. / Assets
Spec. Imp. Res. / Assets
Doubtful Loans
Substandard Loans
NPL / Assets
Equity / Assets
NCO / Assets
Cap. Imp. Ratio
EBTLLP / Assets
% Loans
Net Loans / Assets
Size
NPL Cov. Ratio
(T1 + T2) / RWA
Cost-Income Ratio
ROAA
Rec. Ear. Pow.
Liq. Assets / Fund
Z-Score

2633
2627
2541
2534
2515
2536
2529
2638
2507
2544
2627
2612
2632
2633
2546
2626
2634
2638
2638
2637
2638

1072.78
0.61
0.27
1.88
3.09
3.32
6.56
11.40
-0.70
42.66
1.18
6.90
65.24
5.82
34.01
18.21
66.44
0.44
1.20
17.44
34.02

334.90
0.47
0.24
1.44
2.46
2.80
5.62
10.65
-0.51
33.69
1.16
4.87
67.25
5.81
35.21
15.89
65.22
0.41
1.19
13.33
29.86

5067.92
0.61
0.22
1.62
2.35
2.32
5.72
4.09
0.81
38.92
0.60
17.17
13.38
1.16
18.84
13.52
19.42
0.64
0.61
14.38
21.49

74171.91
7.64
3.01
14.15
18.14
20.84
147.81
94.44
2.00
895.56
12.34
387.02
90.40
11.21
441.18
505.00
775.94
11.03
5.19
195.46
172.97

5.40
-0.65
0.00
0.00
0.00
0.00
0.01
1.18
-10.90
0.00
-4.47
-76.19
1.69
1.69
0.00
0.13
29.45
-5.68
-5.68
1.28
-0.86

32.30
-0.07
0.00
0.00
0.01
0.27
0.87
4.85
-4.05
3.33
-0.24
-9.14
25.63
3.48
2.46
9.27
40.56
-1.82
-0.28
3.19
3.92

24961.80
2.85
1.08
7.89
11.20
11.09
19.18
22.43
2.00
165.66
2.49
55.89
86.86
10.13
78.00
51.22
107.69
1.75
2.55
74.48
103.50

Table 3. Descriptive statistics for mutual banks (banche di credito cooperativo, casse Raiffesen and casse rurali).
LLP is loan loss provisions. Gen. Imp. Res. is general loan impairment reserves. Spec. Imp. Res. is specific loan
impairment reserves. Doub. Loans is doubtful loans, namely 90+ days past due loans with substantial risk of loss.
Subst. Loans is substandard loans, namely 90+ days past due loans with unlikely repayment. NPL is impaired loans.
NCO is net charge-offs. Cap. Imp. Ratio is the capital impairment ratio calculated as Unreserved Impaired Loans
/ Equity. EBTLLP is earnings before taxes and loan loss provisions. Size is the natural logarithm of total asset.
NPL Cov. Ratio is the loan loss reserves / Impaired Loans ratio. (T1 + T2) / RWA is the ratio between the sum of
Tier 1 and Tier 2 capital over risk weighted assets, i.e. the capital adequacy ratio. ROAA is the return on average
assets. Rec. Ear. Pow. is the recurring earning power ratio, calculated as the ratio between after tax profits, adding
back provisions for bad debts, over total asset. Liq. Asset / Fund is the ratio between liquid asset and customer
and short-term funds, i.e. the deposit run off ratio. Z-score is calculated as: (ROAA + Equity/Asset) /ROAA .

30

Small cooperative banks

Variable

Obs.

Mean

Median

Std. dev.

Max

Min

1st-pct

99th-pct

Assets mln e
LLP / Assets
Gen. Imp. Res. / Assets
Spec. Imp. Res. / Assets
Doub. Loans / Assets
Subst. Loans / Assets
NPL / Assets
Equity / Assets
NCO / Assets
Cap. Imp. Ratio
EBTLLP / Assets
% Loans
Net Loans / Assets
Size
NPL Cov. Ratio
(T1 + T2) / RWA
Cost-Income Ratio
ROAA
Rec. Ear. Pow.
Liq. Assets / Fund
Z-Score

234
234
216
217
212
211
217
234
210
217
234
226
234
234
217
230
233
234
234
234
234

21618.10
0.85
14.17
49.15
74.95
37.45
7.39
10.59
-5.39
41.91
1.28
13.11
68.74
8.07
47.75
18.22
63.19
0.24
1.32
24.24
32.84

3110.85
0.63
0.48
2.43
4.14
2.43
6.64
9.80
-0.47
34.36
1.31
6.49
70.45
8.04
46.82
14.65
63.02
0.40
1.33
17.30
25.85

84719.46
0.89
116.42
391.70
596.32
291.63
4.50
4.05
41.02
33.49
0.63
47.92
14.75
1.84
12.13
11.65
13.05
0.73
0.60
34.52
24.85

747104.30
7.14
1083.94
3587.14
6093.57
2859.08
26.22
37.85
0.66
240.68
2.76
571.22
96.39
13.52
83.02
80.54
113.85
1.63
3.01
409.74
114.63

72.60
0.01
0.00
0.00
0.05
0.08
0.13
3.96
-479.70
0.20
-1.66
-22.06
3.99
4.28
22.27
0.00
12.54
-4.23
-1.50
1.40
2.68

112.60
0.02
0.03
0.10
0.13
0.15
0.38
4.35
-190.21
1.30
-0.54
-13.76
14.08
4.72
24.93
7.74
35.50
-2.46
-0.25
1.69
3.18

611994.80
5.62
824.21
3138.78
4257.37
2071.32
21.18
27.08
0.50
148.53
2.73
235.41
93.49
13.32
82.00
70.39
108.89
1.46
2.85
146.68
112.46

Table 4. Descriptive statistics for small cooperative banks (banche popolari). LLP is loan loss provisions. Gen.
Imp. Res. is general loan impairment reserves. Spec. Imp. Res. is specific loan impairment reserves. Doub. Loans
is doubtful loans, namely 90+ days past due loans with substantial risk of loss. Subst. Loans is substandard loans,
namely 90+ days past due loans with unlikely repayment. NPL is impaired loans. NCO is net charge-offs. Cap.
Imp. Ratio is the capital impairment ratio calculated as Unreserved Impaired Loans / Equity. EBTLLP is earnings
before taxes and loan loss provisions. Size is the natural logarithm of total asset. NPL Cov. Ratio is the loan loss
reserves / Impaired Loans ratio. (T1 + T2) / RWA is the ratio between the sum of Tier 1 and Tier 2 capital over
risk weighted assets, i.e. the capital adequacy ratio. ROAA is the return on average assets. Rec. Ear. Pow. is
the recurring earning power ratio, calculated as the ratio between after tax profits, adding back provisions for bad
debts, over total asset. Liq. Asset / Fund is the ratio between liquid asset and customer and short-term funds, i.e.
the deposit run off ratio. Z-score is calculated as: (ROAA + Equity/Asset) /ROAA .

31

Commercial banks
Variable

Obs.

Mean

Median

Std. dev.

Max

Min

1st-pct

99th-pct

Assets mln e
LLP / Assets
Gen. Imp. Res. / Assets
Spec. Imp. Res. / Assets
Doub. Loans / Assets
Subst. Loans / Assets
NPL / Assets
Equity / Assets
NCO / Assets
Cap. Imp. Ratio
EBTLLP / Assets
% Loans
Net Loans / Assets
Size
NPL Cov. Ratio
(T1 + T2) / RWA
Cost-Income Ratio
ROAA
Rec. Ear. Pow.
Liq. Assets / Fund
Z-Score

405
397
359
363
355
351
369
404
337
346
397
385
405
405
369
395
402
404
404
403
404

31541.46
0.71
0.42
2.19
3.27
2.20
5.52
10.21
-0.35
42.79
1.14
15.35
60.42
8.36
59.31
18.29
68.49
0.34
1.35
30.41
24.49

4337.70
0.47
0.37
1.59
2.57
1.52
4.41
7.85
-0.23
26.44
1.10
6.34
67.07
8.38
52.61
14.90
66.19
0.34
1.16
22.05
16.72

84219.65
0.81
0.43
2.27
3.11
2.16
5.05
8.70
0.62
48.71
1.33
50.17
24.59
2.09
35.51
11.96
24.28
1.46
1.62
38.40
22.99

438298.70
5.65
5.82
15.02
20.56
15.02
31.69
93.84
4.18
340.50
12.21
605.38
96.39
12.99
450.00
131.58
300.00
18.88
21.50
405.67
123.74

18.10
-0.04
0.00
0.00
0.00
0.00
0.00
1.23
-2.93
0.00
-6.23
-79.40
0.00
2.90
14.29
0.00
18.18
-5.89
-4.42
-161.93
-1.59

35.90
-0.02
0.00
0.00
0.03
0.00
0.05
2.37
2.40
0.00
-3.24
-43.71
3.04
3.58
19.75
6.69
30.62
-3.24
-1.34
-16.88
1.12

419244.70
4.67
1.35
10.88
14.07
9.26
23.76
39.78
0.66
247.70
5.05
281.19
95.19
12.95
200.00
70.94
154.55
3.36
5.55
129.89
115.13

Table 5. Descriptive statistics for commercial banks. LLP is loan loss provisions. Gen. Imp. Res. is general loan
impairment reserves. Spec. Imp. Res. is specific loan impairment reserves. Doub. Loans is doubtful loans, namely
90+ days past due loans with substantial risk of loss. Subst. Loans is substandard loans, namely 90+ days past
due loans with unlikely repayment. NPL is impaired loans. NCO is net charge-offs. Cap. Imp. Ratio is the capital
impairment ratio calculated as Unreserved Impaired Loans / Equity. EBTLLP is earnings before taxes and loan
loss provisions. Size is the natural logarithm of total asset. NPL Cov. Ratio is the loan loss reserves / Impaired
Loans ratio. (T1 + T2) / RWA is the ratio between the sum of Tier 1 and Tier 2 capital over risk weighted assets,
i.e. the capital adequacy ratio. ROAA is the return on average assets. Rec. Ear. Pow. is the recurring earning
power ratio, calculated as the ratio between after tax profits, adding back provisions for bad debts, over total asset.
Liq. Asset / Fund is the ratio between liquid asset and customer and short-term funds, i.e. the deposit run off ratio.
Z-score is calculated as: (ROAA + Equity/Asset) /ROAA .

32

Savings banks
Variable
Assets mln e
LLP / Assets
Gen. Imp. Res. / Assets
Spec. Imp. Res. / Assets
Doub. Loans / Assets
Subst. Loans / Assets
NPL / Assets
Equity / Assets
NCO / Assets
Cap. Imp. Ratio
EBTLLP / Assets
% Loans
Net Loans / Assets
Size
NPL Cov. Ratio
(T1 + T2) / RWA
Cost-Income Ratio
ROAA
Rec. Ear. Pow.
Liq. Assets / Fund
Z-Score

Obs.
232
232
227
226
226
226
226
232
225
220
232
231
232
232
226
232
232
232
232
232
232

Mean
4780.29
0.80
0.53
2.82
4.06
2.64
6.71
8.43
-0.49
44.92
1.46
7.76
75.85
7.93
53.13
14.06
62.55
0.40
1.47
16.38
22.71

Median
2434.95
0.61
0.51
2.04
3.01
2.16
5.39
8.03
-0.45
34.35
1.39
3.35
77.12
7.80
51.09
12.99
62.35
0.39
1.44
12.65
19.12

Std. dev.
6827.62
0.61
0.28
2.45
3.35
1.79
4.78
2.07
0.65
35.84
0.74
38.49
10.72
0.95
18.44
4.89
9.83
0.69
0.59
12.60
14.42

Max
40982.80
3.70
2.73
14.13
19.07
8.75
24.54
15.72
6.35
188.37
5.95
437.49
93.22
10.62
195.78
39.31
96.50
3.60
4.65
57.43
79.91

Min
698.00
0.08
0.14
0.18
0.18
0.21
0.49
3.76
-3.43
1.51
-3.53
-10.38
42.65
6.55
23.80
7.15
28.53
-3.61
0.11
1.42
3.53

1st-pct
755.70
0.10
0.18
0.32
0.38
0.30
0.75
4.66
-1.78
2.32
0.29
-9.27
45.36
6.63
28.16
7.81
38.31
-1.61
0.28
1.88
3.66

99th-pct
40008.89
2.75
1.32
11.08
15.08
8.07
22.69
14.08
0.29
165.23
3.71
59.31
92.04
10.60
132.65
30.38
89.99
2.55
3.19
53.36
74.10

Table 6. Descriptive statistics for savings banks. LLP is loan loss provisions. Gen. Imp. Res. is general loan
impairment reserves. Spec. Imp. Res. is specific loan impairment reserves. Doub. Loans is doubtful loans, namely
90+ days past due loans with substantial risk of loss. Subst. Loans is substandard loans, namely 90+ days past
due loans with unlikely repayment. NPL is impaired loans. NCO is net charge-offs. Cap. Imp. Ratio is the capital
impairment ratio calculated as Unreserved Impaired Loans / Equity. EBTLLP is earnings before taxes and loan
loss provisions. Size is the natural logarithm of total asset. NPL Cov. Ratio is the loan loss reserves / Impaired
Loans ratio. (T1 + T2) / RWA is the ratio between the sum of Tier 1 and Tier 2 capital over risk weighted assets,
i.e. the capital adequacy ratio. ROAA is the return on average assets. Rec. Ear. Pow. is the recurring earning
power ratio, calculated as the ratio between after tax profits, adding back provisions for bad debts, over total asset.
Liq. Asset / Fund is the ratio between liquid asset and customer and short-term funds, i.e. the deposit run off ratio.
Z-score is calculated as: (ROAA + Equity/Asset) /ROAA .

33

Dependent variable: (LLP/Assets)i,t

(LLP/Assets)i,t1
(LLP/Assets)i,t2
N P L/Assetsi,t
N CO/Assetsi,t
N P L cov. Ratioi,t
Equity/Assetsi,t
Capital ratioi,t1
EBT LLP/Assetsi,t
ROAAi,t
Rec. Earn. P ow.i,t
Cost income ratioi,t
% Loansi,t1
N et Loans / Assetsi,t1
Sizei,t
Z Scorei,t1
Output Gapt
Credit/GDPt
Time dummy
Constant
Lagged Macro
Bank Type
No. Obs.
No. Banks
Arellano-Bond AR(1)
Arellano-Bond AR(2)
Hansen Overident. Test
Diff-in-Hansen test
GMM-type Excluding
GMM-type Difference
IV-type Excluding
IV-type Difference
N. Instruments

(1)

(2)

(3)

(4)

(5)

0.250***
0.007
0.044***
0.251**

0.213**
-0.011
0.071***
0.255*

0.220**
0.044
0.049***
0.230*

0.059
0.006
0.007
0.092**

-0.104***

0.143
-0.056
0.074***
0.230*
0.014
-0.112***

-0.152***

-0.017

0.338**

0.227***

-0.116***
0.013
0.373**

0.721***
-1.099***

0.353**
-0.004
0.014*
-0.094

-0.010**
-0.000
0.002
-0.040*

0.440
0.044

-0.005
0.006
-0.034
0.009
0.212
0.059

0.703
0.081

-1.275
-0.074

Yes
No
No
All

Yes
No
No
All

Yes
No
No
All

Yes
No
No
All

Yes
No
No
All

2123
471
0.000
0.845
0.260

2108
467
0.000
0.698
0.146

2100
466
0.000
0.336
0.186

2100
469
0.000
0.690
0.104

2112
468
0.030
0.330
0.137

0.202
0.468
0.225
0.611
62

0.064
0.580
0.113
0.755
62

0.230
0.268
0.181
0.369
62

0.195
0.148
0.093
0.447
62

0.458
0.060
0.161
0.187
62

-0.007
0.011*
-0.071

-0.005
0.015**
-0.134

0.806
0.092

Table 7. GMM estimation for LLP. The sample period is 2007 - 2014. All banks. */**/*** indicate significance at
the 10%, 5% and 1% level. See Section (3) for variables definitions.

34

35
2061
466
0.000
0.620
0.407
0.302
0.585
0.375
0.579
82

Yes
No
No
All
2076
470
0.000
0.543
0.386
0.257
0.626
0.370
0.454
82

No. Obs.
No. Banks
Arellano-Bond AR(1)
Arellano-Bond AR(2)
Hansen Overident. Test
Diff-in-Hansen test
GMM-type Excluding
GMM-type Difference
IV-type Excluding
IV-type Difference
N. Instruments

-0.001*
-0.001
0.017***

-0.001*
-0.001
0.019***

Time dummy
Constant
Lagged Macro
Bank Type

0.0285

0.018

0.213
0.647
0.335
0.468
82

2047
466
0.000
0.842
0.353

Yes
No
No
All

0.003
0.000

-0.001***
-0.001
0.023***
0.000

0.018

0.006

0.720***
-0.001
0.010***
-0.004

(3)

0.220
0.504
0.283
0.376
82

2058
469
0.000
0.777
0.288

Yes
No
No
All

-0.015
0.001

-0.001**
-0.002
0.023***

0.008
-0.003
0.025

0.701***
0.011
0.007***
-0.004

(4)

0.262
0.514
0.299
0.609
82

2061
466
0.000
0.830
0.333

Yes
No
No
All

-0.048
-0.004

-0.001
-0.001
0.022***

0.081
-0.073*
0.002

0.006

0.720***
0.015
-0.000
-0.012

(5)

0.745
0.101
0.337
0.937
102

2076
468
0.000
0.675
0.391

Yes
No
No
All

0.047
0.002

0.700
0.039
0.198
0.807
102

2056
467
0.000
0.646
0.234

0.907
0.192
0.798
0.047
102

2058
464
0.000
0.578
0.684

Yes
No
No
All

-0.410**
-0.026*

-0.001
0.038
0.004
Yes
No
No
All

-0.001

-0.058
-0.001
0.002***

-0.001*
0.007**

0.811***
0.086***
0.004
-0.024*

(8)

0.009

0.002**

0.002**

0.012**

0.031

-0.000
-0.000

-0.000
0.005
0.030

0.777***
0.028
0.015*
-0.016

(7)

0.800***
0.040
0.007***
-0.007

(6)

Table 8. GMM estimation for generic reserves. The sample period is 2007 - 2014. All banks. */**/*** indicate significance at the 10%, 5% and 1% level.
See Section (3) for variables definitions.

Yes
No
No
All

0.036
0.004

0.002

0.003

0.018
0.002

0.748***
0.017
0.005**
-0.009
-0.001

0.730***
0.012
0.006***
-0.012

(2)

(Gen. Res./Assets)i,t1
(Gen. Res./Assets)i,t2
N P L/Assetsi,t
N CO/Assetsi,t
N P L cov. Ratioi,t
N P L cov. Ratioi,t1
Equity/Assetsi,t
Capital ratioi,t1
EBT LLP/Assetsi,t
ROAAi,t
Cost income ratioi,t
% Loansi,t
% Loansi,t1
N et Loans / Assetsi,t1
Sizei,t
Z Scorei,t1
Cap. Imp. Ratioi,t
Output Gapt
Credit/GDPt

(1)

Dependent variable: (Gen. Res./Assets)i,t

36
2083
465
0.009
0.798
0.554
0.680
0.358
0.513
0.522
42

Yes
No
No
All
2097
469
0.005
0.647
0.272
0.386
0.242
0.260
0.386
42

No. Obs.
No. Banks
Arellano-Bond AR(1)
Arellano-Bond AR(2)
Hansen Overident. Test
Diff-in-Hansen test
GMM-type Excluding
GMM-type Difference
IV-type Excluding
IV-type Difference
N. Instruments

-0.015
-0.011
0.098

0.002
-0.038**
0.353***

Time dummy
Constant
Lagged Macro
Bank Type

-0.310

0.139

0.622
0.165
0.274
0.596
42

2067
465
0.010
0.342
0.326

Yes
No
No
All

0.286
0.057

-0.001
-0.044**
0.357**
0.012

0.076

-0.064

0.236
-0.002
0.413***
0.194

(3)

0.254
0.194
0.175
0.258
42

2078
476
0.002
0.489
0.162

Yes
No
No
All

0.282
0.018

-0.003
-0.022
0.324***

-0.036
0.084
0.310

0.274
-0.058
0.386***
0.282

(4)

0.223
0.653
0.336
0.736
42

2081
465
0.003
0.801
0.417

Yes
No
No
All

-1.234
-0.013

0.007
-0.032
0.305

0.438
-0.711
-0.003

0.034

0.335
0.041
0.292***
0.210

(5)

0.393
0.165
0.214
0.319
42

2099
467
0.002
0.390
0.212

Yes
No
No
All

2.445
0.311

0.767
0.775
0.824
0.764
42

2079
466
0.013
0.203
0.874

0.323
0.264
0.251
0.326
42

2082
463
0.013
0.640
0.250

Yes
No
No
All

-0.688
0.173

-0.045***
2.768
0.315
Yes
No
No
All

0.070

-0.566
-0.014
0.007

0.020*
-0.028

0.326
0.044
0.263**
0.209

(8)

0.057

0.006

0.004

0.070

-0.161

0.017*
-0.172***

0.027***
-0.045
0.068

0.035
0.054
0.696***
0.147

(7)

0.180
0.037
0.350***
0.158

(6)

Table 9. GMM estimation for specific reserves. The sample period is 2007 - 2014. All banks. */**/*** indicate significance at the 10%, 5% and 1% level.
See Section (3) for variables definitions.

Yes
No
No
All

0.113
0.130

-0.021

-0.011

1.097
0.096

0.170
-0.032
0.361***
0.066
0.049***

0.240
0.023
0.387***
0.256

(2)

(Spec. Res./Assets)i,t1
(Spec. Res./Assets)i,t2
N P L/Assetsi,t
N CO/Assetsi,t
N P L cov. Ratioi,t
N P L cov. Ratioi,t1
Equity/Assetsi,t
Capital ratioi,t1
EBT LLP/Assetsi,t
ROAAi,t
Cost income ratioi,t
% Loansi,t
% Loansi,t1
N et Loans / Assetsi,t1
Sizei,t
Z Scorei,t1
Cap. Imp. Ratioi,t
Output Gapt
Credit/GDPt

(1)

Dependent variable: (Spec. Res./Assets)i,t

Dep. variable: (Doubt. Loans/Assets)i,t

N P Li,t1
N P Li,t2
N P L cov. Ratioi,t1
Equity/Assetsi,t1
Capital ratioi,t1
(Spec. Res./Asset)i,t1
(Gen. Res./Asset)i,t1
ROAAi,t1
Cost income ratioi,t
% Loansi,t
Sizei,t
Cap. Imp. Ratioi,t
U nempl. ratet1
Credit/GDPt1
Output Gapt1
Time dummy
Constant
Lagged Macro
Bank Type
No. Obs.
No. Banks
Arellano-Bond AR(1)
Arellano-Bond AR(2)
Hansen Overident. Test
Diff-in-Hansen test
GMM-type Excluding
GMM-type Difference
IV-type Excluding
IV-type Difference
N. Instruments

Dep. variable: (Substd. Loans/Assets)i,t

(1)

(2)

(3)

(1)

(2)

(3)

0.731***
0.138***

0.747***
0.092

0.736***
0.031

0.741***
0.037

-0.082
-0.059*
0.150

-0.055
-0.074**
0.180*

0.410***
0.095*
0.003
0.048
-0.003
0.273**

-0.192***
0.102*

-0.189***
0.109**

0.444***
-0.035
0.002
0.046
0.077*

-0.732***
0.027*
-0.006
0.224**

-0.658**
0.032**
-0.010
0.194*

1.588***
-0.354
-0.049**
-0.002
-0.307*

1.689***
-0.377
-0.053**
0.003
-0.318**

1.582
-0.106
1.430

-0.541
0.090

-0.418***
0.025**
-0.009
0.146*
0.036***
-1.904
0.216

-3.316
0.578
0.766

-3.682
0.578

1.249*
-0.026
-0.035**
-0.002
-0.027
0.033***
-1.918
0.266

Yes
No
No
All

Yes
No
No
All

Yes
No
No
All

Yes
No
No
All

Yes
No
No
All

Yes
No
No
All

2104
465
0.000
0.496
0.339

2104
465
0.000
0.301
0.114

2067
459
0.000
0.193
0.490

2101
466
0.000
0.918
0.551

2101
466
0.000
0.470
0.665

2068
464
0.000
0.902
0.467

0.276
0.491
0.350
0.332
62

0.228
0.138
0.101
0.476
62

0.160
0.910
0.432
0.713
62

0.344
0.743
0.863
0.012
62

0.500
0.721
0.883
0.017
62

0.596
0.309
0.552
0.139
62

Table 10. GMM estimation for doubtful and substandard loans. The sample period is 2007 - 2014. All banks.
*/**/*** indicate significance at the 10%, 5% and 1% level. See Section (3) for variables definitions. NPL is
alternatively doubtful loans over total assets and substandard loans over total assets.

37

38

-0.074***
0.389***

-0.010
-0.004
0.169
0.004
0.002

1099
250
0.000
0.526
0.790
0.935
0.300
0.790
0.401
62

-0.082***
0.534***

-0.009
-0.002
0.091
-0.012
0.003
Yes
No
No
Coop.
1697
379
0.000
0.399
0.513
0.716
0.242
0.614
0.113
62

Time dummy
Constant
Lagged Macro
Bank Type

No. Obs.
No. Banks
Arellano-Bond AR(1)
Arellano-Bond AR(2)
Hansen Overident. Test
Diff-in-Hansen test
GMM-type Excluding
GMM-type Difference
IV-type Excluding
IV-type Difference
N. Instruments
0.600
0.911
0.794
1.000
62

831
185
0.029
0.988
0.851

Yes
No
No
Medium

0.090*
-0.028***

-0.007
0.008
0.273***

0.388**

0.007

0.065
-0.145**
0.087***
0.185

0.563
0.384
0.602
0.156
42

183
43
0.022
0.666
0.502

Yes
No
No
Large

-0.122*
0.002

-0.001
0.006*
-0.047

-0.195**

-0.003

0.308**
0.018
0.068***
0.268

0.758
0.069
0.455
0.059
62

1685
379
0.000
0.508
0.316

Yes
No
No
Coop.

-0.013
0.002

-0.009
0.001
0.063

0.492***

0.000
-0.085
0.075***
0.151*
0.005
-0.088***

0.904
0.300
0.763
0.300
62

1094
249
0.000
0.530
0.743

Yes
No
No
Small

0.004
0.002

-0.010
-0.003
0.162

0.365***

0.080
-0.063
0.050***
0.067
0.002
-0.076***

(2)

0.488
0.873
0.692
0.905
62

826
184
0.029
0.947
0.757

Yes
No
No
Medium

0.097*
-0.028***

-0.005
0.008
0.269***

0.387**

0.048
-0.161***
0.095***
0.188
0.003
-0.001

0.388
0.542
0.542
0.214
42

179
43
0.020
0.588
0.479

Yes
No
No
Large

-0.086
0.000

-0.000
0.006*
-0.035

-0.165**

0.263**
-0.041
0.067***
0.158
0.000
0.001

Dependent variable: (LLP/Assets)i,t

0.482
0.096
0.316
0.052
62

1683
375
0.000
0.414
0.199

Yes
No
No
Coop.

-0.010
-0.006
0.145*
0.002
-0.021
0.002

0.408***

-0.081***

0.077
-0.082
0.075***
0.164*

(3)

0.939
0.120
0.714
0.115
62

1090
246
0.000
0.242
0.615

Yes
No
No
Small

-0.009
-0.008
0.216
0.002
0.010
0.003

0.333***

-0.081***

0.130
-0.090
0.053***
0.059

0.462
0.632
0.497
0.968
62

821
184
0.027
0.953
0.579

Yes
No
No
Medium

-0.007
0.009
0.237**
-0.003
0.081*
-0.023**

0.355

0.004

0.078
-0.144*
0.074***
0.152

0.634
0.315
0.492
0.377
42

182
43
0.084
0.889
0.495

Yes
No
No
Large

-0.001
0.003
-0.052
-0.009
-0.118**
0.005

-0.156

0.010

0.271
0.054
0.084***
0.440*

Table 11. GMM estimation for LLP. The sample period is 2007 - 2014. Different types of banks. */**/*** indicate significance at the 10%, 5% and 1% level. See Section (3) for
variables definitions and Section (5.4) for information on the categories.

Yes
No
No
Small

0.090
-0.059
0.049***
0.069

0.056
-0.054
0.063***
0.154*

(LLP/Assets)i,t1
(LLP/Assets)i,t2
N P L/Assetsi,t
N CO/Assetsi,t
N P L cov. Ratioi,t
Equity/Assetsi,t
Capital ratioi,t1
EBT LLP/Assetsi,t
ROAAi,t
Rec. Earn. P ow.i,t
Cost income ratioi,t
% Loansi,t1
N et Loans / Assetsi,t1
Sizei,t
Z Scorei,t1
Output Gapt
Credit/GDPt

(1)

39

-0.072***
0.016
0.401***

-0.007
0.001
0.133
0.018
-0.003

1095
250
0.000
0.987
0.661
0.925
0.174
0.702
0.233
62

-0.072**
-0.019
0.543***

-0.007
-0.006
0.115
-0.017
0.007
Yes
No
No
Coop.
1689
378
0.000
0.423
0.468
0.870
0.094
0.613
0.068
62

Time dummy
Constant
Lagged Macro
Bank Type

No. Obs.
No. Banks
Arellano-Bond AR(1)
Arellano-Bond AR(2)
Hansen Overident. Test
Diff-in-Hansen test
GMM-type Excluding
GMM-type Difference
IV-type Excluding
IV-type Difference
N. Instruments
0.532
0.911
0.765
0.823
62

821
184
0.018
0.072
0.815

Yes
No
No
Medium

0.119*
-0.030**

-0.006
0.009
0.289**

0.038
-0.015
0.447***

0.043
-0.172**
0.085***
0.186

0.342
0.287
0.473
0.051
42

182
43
0.019
0.772
0.278

Yes
No
No
Large

-0.114**
0.003

-0.001
0.005
-0.035

0.019
-0.015
-0.247**

0.286*
0.035
0.062*
0.267

-0.001
-0.000
0.002
0.044

-0.002
-0.000
0.000
-0.000

0.503
0.285
0.729
0.006
62

1697
379
0.000
0.204
0.384

Yes
No
No
Coop.

0.352
0.158
0.366
0.023
62

1089
249
0.000
0.416
0.190

Yes
No
No
Small

-0.006
-0.003

0.949***
-1.113***

0.847***
-1.079***

-0.029*
0.002

-0.006

0.025
0.004
-0.001
0.051*

-0.010

0.029
0.000
0.004
0.051*

Dependent variable: (LLP/Assets)i,t

(5)

0.266
0.896
0.586
0.423
62

822
184
0.001
0.306
0.596

Yes
No
No
Medium

-0.027
0.003

-0.011***
0.001
0.003
0.018

0.653***
-1.148***

0.027*

0.045*
-0.004
0.016
0.099**

0.983
0.442
0.933
0.238
42

175
43
0.181
0.298
0.894

Yes
No
No
Large

-0.103*
0.003

-0.006
-0.003
0.005
-0.031

0.405
-0.977***

0.009

0.256
-0.041
-0.004
-0.011

Table 11 (cont). GMM estimation for LLP. The sample period is 2007 - 2014. Different types of banks. */**/*** indicate significance at the 10%, 5% and 1% level. See Section
(3) for variables definitions and Section (5.4) for information on the categories.

Yes
No
No
Small

0.123
0.001
0.055***
0.079

0.030
-0.059
0.058***
0.157**

(LLP/Assets)i,t1
(LLP/Assets)i,t2
N P L/Assetsi,t
N CO/Assetsi,t
N P L cov. Ratioi,t
Equity/Assetsi,t
Capital ratioi,t1
EBT LLP/Assetsi,t
ROAAi,t
Rec. Earn. P ow.i,t
Cost income ratioi,t
% Loansi,t1
N et Loans / Assetsi,t1
Sizei,t
Z Scorei,t1
Output Gapt
Credit/GDPt

(4)

DEP. VARIABLE: (LLP/Assets)i,t

(1)

(2)

(4)

(5)

EBT LLP/Assets
0.373**
0.544***
0.375**
-0.300*
-0.357*
-0.464***
0.144
-0.187
-0.302***

-0.049
-0.028

N CO/Assets
-0.737**
-0.822***
-0.395**
-0.453***

0.071
0.035

Equity/Assets
0.023
0.019
0.028
-0.527*
-0.503
-0.574**
0.246
-0.051
-0.117

0.005
-0.169
-0.009

EBT LLP I(N pl) I(cov)

REP I(N pl) I(cov)
I(N pl)
I(cov)

-0.357**
-0.294***

N CO I(cov)
I(cov)

-0.639**
-0.377**

-0.465
0.146

(E/A) I(N pl) I(cov)

I(N pl)
I(cov)

0.031*
-0.581**
-0.147

0.491***

(3)

0.056

Table 12. GMM estimation for interactions and credit risk dummies. The sample period is 2007 - 2014. All banks.
*/**/*** indicate significance at the 10%, 5% and 1% level. I(N pl) = 1 if (Impaired Loans / Gross Loans) >10%.
I(cov) = 1 if (Loan Loss Reserves / Gross Loans) <50%. See Section (3) for variables definitions. Specification
tests (not shown, but available upon request) confirm the consistency of these models.

40

41
341
0.183

0.051***
0.059*
-0.009*
0.135***
0.001
-0.000
0.018

2008

337
0.254

0.050***
0.020
-0.030***
0.249**
-0.012***
0.000
0.077***

2012

333
0.422

0.120***
0.115*
-0.030**
0.304***
-0.002
0.005*
0.048*

2013

342
0.167

0.016***
0.015
-0.010***
0.085***
0.001
-0.001
0.045***

2008

340
0.167

0.014***
0.015
0.003
0.084
0.001
0.000
0.050***

2012

337
0.246

0.017***
0.021
0.001
0.075***
-0.000
0.002**
0.048***

2013

(Gen. Res./Assets)t

341
0.628

0.375***
0.459***
-0.034***
0.367***
0.015**
-0.033***
0.146***

2008

339
0.532

0.310***
0.088
-0.017
0.691**
-0.002
-0.015***
0.280***

2012

334
0.574

0.434***
0.229
-0.004
0.648***
-0.004
-0.014*
0.279***

2013

(Spec. Res./Assets)t

Table 13. Difference-in-difference estimation for provisions and reserves. All banks. */**/*** indicate significance at the 10%, 5% and 1% level.
Heteroskedastic consistent standard errors. See Section (3) for variables definitions.

No. Banks
R-squared

N P L/Assetst1
N CO/Assetst1
Equity/Assetst1
EBT LLP/Assetst1
% Loanst1
N et Loans / Assetst1
Sizet1

Expl. Var. (t-1) / t =

(LLP/Assets)t