| Summary: | This paper investigates how provisioning behaviour across Central and Eastern European commercial banks is related to the business cycle, income smoothing and capital management. The analysis is conducted on a sample of 52 banks from five European Union countries over the period from 2004 to 2010. These countries are: Latvia, Lithuania, Estonia, Slovenia and Slovakia.
To summarise, the present paper finds evidence that loan loss provisions are highly procyclical across all the researched countries. However, procyclical effect is mitigated by the income smoothing. Additionally, empirical results show that provisions reflect changes in the expected quality of a bank’s loan portfolio, measured by the change in the amount of nonperforming loans. Furthermore, obtained results show strong evidence of capital management through loan loss provisions.
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