Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/106402
Authors: 
Domikowsky, Christian
Bornemann, Sven
Duellmann, Klaus
Pfingsten, Andreas
Year of Publication: 
2014
Series/Report no.: 
Discussion Paper, Deutsche Bundesbank 39/2014
Abstract: 
Several studies have addressed, with conflicting results, the issue of procyclical effects of loan loss provisions in the past. More recently, the weak performance of incurred loss models in the financial crisis has given rise to a new debate on the sound design of credit risk provisioning schemes, which is reflected in the scheduled implementation of an expected loss model in IFRS 9. This study contributes to the extant literature by separately analyzing the cyclical effects of specific and general loan loss provisions under a legislative framework that allows provisions based on expected losses in the loan portfolio. Using three different measures of forward-looking provisioning, we find typical German banks, most of them unlisted and operating regionally, to use specific loan loss provisions countercyclically, in particular for earnings management and by anticipating non-performing loans at the closing date. The use of general loan loss provisions is predominantly motivated by tax considerations, pointing out the considerable importance of the impact of local tax law.
Subjects: 
procyclicality
earnings management
hidden reserves
loan loss provisioning
expected losses
managerial discretion
JEL: 
G01
G21
M41
ISBN: 
978-3-95729-097-7
Document Type: 
Working Paper

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