Bank for International Settlements – Andrés Murcia Pabón and Emanuel Kohlscheen Working Papers No 548, March 2016

“We study the determinants of loan loss provisions and delinquency ratios based on the balance sheets of 554 banks from emerging market economies (EMEs). We find that provisions in EME banks respond mostly to aggregate variables, and very little to idiosyncratic factors. In particular, the bank-specific credit growth rates – usually thought of as a measure of individual risk-taking – do not explain the level of loan loss provisions. There is some evidence that earnings and the size of the intermediaries have an effect on provisions. The predominant effect however is that provisions and actual losses are negatively related to past economic growth and positively related to past aggregate credit growth. We also estimate the forward and backward-looking component of provisions, finding that provisions respond mainly to past reported losses. These findings suggest that EME banks’ provisioning decisions are highly correlated. Since provisions fall when output grows, macroprudential tools that counter this effect could dampen pro-cyclical behavior.”