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The Determinants of Loan Loss Provisions: An Analysis of the Greek Banking System in Light of the Sovereign Debt Crisis

  • Platon Monokroussos
  • Dimitrios Thomakos
  • Thomas A. Alexopoulos
  • Eleni Lydia Tsioli
Chapter
Part of the Palgrave Macmillan Studies in Banking and Financial Institutions book series (SBFI)

Abstract

The study utilizes a new set of macroeconomic and regulatory data to analyze the evolution of loan loss provisioning practices in the Greek banking system over the period 2005–2015. It explores the determinants of the aggregate loan loss reserves to total loans ratio, which reflects the accumulation of provisions net of write-offs and constitutes an important metric of the credit quality of loan portfolios. The empirical results suggest that domestic credit institutions respond relatively quickly to macroeconomic shocks though the latter’s effects on the provisioning behavior of the domestic banking system show significant persistence. Furthermore, the impact of macroeconomic shocks on the loan loss reserves ratio has become stronger (both in terms of magnitude and statistical significance) following the outbreak of the Greek sovereign debt crisis. From a macro policy perspective, this result indicates that a sustainable stabilization of macroeconomic conditions is a key precondition for safeguarding domestic financial stability. For a regulatory standpoint, it suggests that the possibility of macroeconomic regime-related effects on banks’ provisioning policies should be taken into account when macro prudential stress tests of the banking system are designed and implemented.

Keywords

Bank-specific determinants Greek banking system Loan loss provisions Loan loss reserves Macroeconomic determinants Non-performing loans 

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Copyright information

© The Hellenic Bank Association 2017

Authors and Affiliations

  • Platon Monokroussos
    • 1
  • Dimitrios Thomakos
    • 2
  • Thomas A. Alexopoulos
    • 2
  • Eleni Lydia Tsioli
    • 3
    • 4
  1. 1.Eurobank Ergasias S.A.AthensGreece
  2. 2.Department of EconomicsUniversity of PeloponneseTripoliGreece
  3. 3.University of CambridgeCambridgeUK
  4. 4.National and Kapodistrian University of AthensAthensGreece

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