The role of banking supervision in credit risk disclosures and loan loss provisions

Albuquerque, Daniela; Morais, Ana Isabel; Pinto, Inês

doi:10.7819/rbgn.v22i4.4078

Daniela Albuquerque

ISEG - Lisbon School of Economics & Management, University of Lisbon, Management Department, Lisbon, Portugal. E-mail: daniela.albuquerque@aln.iseg.ulisboa.pt

https://orcid.org/0000-0001-7424-3978

Ana Isabel Morais

Advance/CSG, ISEG - Lisbon School of Economics & Management; and University of Lisbon, Management Department, Lisbon, Portugal. E-mail: anamorais@iseg.ulisboa.pt, inespinto@iseg.ulisboa.pt

Management Department, University of Lisbon, Lisbon, Portugal

https://orcid.org/0000-0001-7251-6418

Inês Pinto

Advance/CSG, ISEG - Lisbon School of Economics & Management; and University of Lisbon, Management Department, Lisbon, Portugal. E-mail: anamorais@iseg.ulisboa.pt, inespinto@iseg.ulisboa.pt

https://orcid.org/0000-0001-5535-914X

Responsible Editor:

Prof. Dr. Ilidio Lopes

1
. Daniela Albuquerque, Master, ISEG - Lisbon School of Economics & Management, University of Lisbon, Lisbon, Portugal.

2
. Ana Isabel Morais, PhD, Advance/CSG, ISEG - Lisbon School of Economics & Management, University of Lisbon, Lisbon, Portugal.

3
. Inês Pinto, PhD, Advance/CSG, ISEG - Lisbon School of Economics & Management, University of Lisbon, Lisbon, Portugal.

Contribution of each author

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Contribution Daniela Albuquerque Ana Morais Inês Pinto 1. Definition of research problem √ √ √ 2. Development of hypotheses or research questions (empirical studies) √ √ √ 3. Development of theoretical propositions (theoretical work) 4. Theoretical foundation/literature review √ √ √ 5. Definition of methodological procedures √ √ √ 6. Data collection √ 7. Statistical analysis √ √ 8. Analysis and interpretation of data √ √ √ 9. Critical revision of the manuscript √ 10. Manuscript writing √ √ 11. Other (please specify which)

Contribution	Daniela Albuquerque	Ana Morais	Inês Pinto
1. Definition of research problem	√	√	√
2. Development of hypotheses or research questions (empirical studies)	√	√	√
3. Development of theoretical propositions (theoretical work)
4. Theoretical foundation/literature review	√	√	√
5. Definition of methodological procedures	√	√	√
6. Data collection	√
7. Statistical analysis	√		√
8. Analysis and interpretation of data	√	√	√
9. Critical revision of the manuscript		√
10. Manuscript writing	√		√
11. Other (please specify which)

	Panel A: Total Sample
	N^os of Banks
Initial banks (ECB list)	120
- subsidiaries of banks located outside EU	21
- subsidiaries of banks included in the sample	11
- banks that do not apply IFRS	4
- banks with missing data	15
- banks founded after 2012 or in liquidation	7
- others	2
Total	60
Countries:	Panel B: Sample by Country
Countries:	Nº of Banks	%
Austria	3	5.00%
Belgium	4	6.67%
Cyprus	1	1.67%
Finland	1	1.67%
France	5	8.33%
Germany	11	18.33%
Greece	4	6.67%
Ireland	3	5.00%
Italy	9	15.00%
-Luxembourg	1	1.67%
Malta	1	1.67%
Netherland	4	6.67%
Portugal	3	5.00%
Slovenia	2	3.33%
Spain	8	13.33%
Total	60	100.00%

Countries:	SPOWER
Austria	70.59%
Belgium	76.47%
Cyprus	88.24%
Finland	58.82%
France	94.12%
Germany	82.35%
Greece	76.47%
Ireland	64.71%
Italy	88.24%
Luxembourg	94.12%
Malta	100.00%
Netherland	88.24%
Portugal	82.35%
Slovenia	88.24%
Spain	76.47%
Mean	81.96%

	Mean	Median	Standard Deviation	Min	Max
TOTALINDEX	0.728	0.733	0.162	0.267	1
PILLAR3INDEX	0.542	0.600	0.334	0	1
IFRS7INDEX	0.856	0.875	0.113	0.5	1
SPOWER	0.817	0.823	0.083	0.588	1
LLP	0.016	0.008	0.0249	0	0.257
EBT	0.006	0.007	0.012	-0.093	0.056
CAP	0.125	0.060	0.120	0	0.905
NPL	0.084	0.046	0.102	0	0.610
LOANS	0.587	0.618	0.160	0.176	0.886
ΔLOANS	-0.008	-0.025	0.159	1.160	-0.950
SIZE	11.147	11.116	0.593	9.628	12.318
GDP	0.009	0.007	0.0361	-0.073	0.251

Note. All variables are defined in ^{Appendix B} Appendix B - Variable Definitions Variables Definition TOTALINDEX, PILLAR3INDEX, IFRS7INDEX Self-constructed disclosure index that measures a bank’s compliance with both IFRS 7 and Pillar 3, with Pillar 3, or with IFRS 7, respectively. See Appendix A. SPOWER Index based on the measure of supervisory power developed by Barth et al. (2013), which ranges from 0 to 17 based on the World Bank Database 2012 survey on bank regulation and supervision. LLP Ratio of LLPs (loan loss provisions) to total loans. EBT Ratio of earnings before taxes and LLPs to total assets. TIER 1 Tier I capital. NPL Ratio of nonperforming loans to total assets. LOANS Ratio of customers loans to assets. ΔLOANS Loan growth in year t. SIZE The natural logarithm of total assets to control for bank size. GDP Annual growth rate of the gross domestic product for each country. CAP Ratio of actual regulatory capital (primary or Tier I capital) before loan loss reserves to the minimum required regulatory capital. DSSM Dummy variable that equals one for the period between 2014 and 2015, which indicates the period after the launch of the SSM: DPILLAR3AM and DIFRS7AM DPILLAR3AM DIFRS7AM Dummy variables that equal one if the company registers a PILLAR3 or IFRS7 score above the sample median of the PILLAR3 and IFRS7 indexes, respectively. .

	SPOWER	LLP	EBT	CAP	NPL	LOANS	ΔLOANS	SIZE	GDP
SPOWER	1
LLP	-0.09*	1
EBT	0.01	0.06	1
CAP	-0.01	-0.03	-0.09	1
NPL	-0.12**	0.38***	0.06	0.04	1
LOANS	0.00	-0.06	-0.05	0.01	0.235***	1
ΔLOANS	-0.034	-0.175***	0.08	-0.01	0.02	0.02	1
SIZE	0.12**	-0.29***	-0.27***	-0.05	-0.35***	0.00	*0.11	1
GDP	-0.13**	-0.27***	-0.09	0.01	-0.11**	0.0171	-0.06	-0.03	1

Note. All variables are defined in ^{Appendix B} Appendix B - Variable Definitions Variables Definition TOTALINDEX, PILLAR3INDEX, IFRS7INDEX Self-constructed disclosure index that measures a bank’s compliance with both IFRS 7 and Pillar 3, with Pillar 3, or with IFRS 7, respectively. See Appendix A. SPOWER Index based on the measure of supervisory power developed by Barth et al. (2013), which ranges from 0 to 17 based on the World Bank Database 2012 survey on bank regulation and supervision. LLP Ratio of LLPs (loan loss provisions) to total loans. EBT Ratio of earnings before taxes and LLPs to total assets. TIER 1 Tier I capital. NPL Ratio of nonperforming loans to total assets. LOANS Ratio of customers loans to assets. ΔLOANS Loan growth in year t. SIZE The natural logarithm of total assets to control for bank size. GDP Annual growth rate of the gross domestic product for each country. CAP Ratio of actual regulatory capital (primary or Tier I capital) before loan loss reserves to the minimum required regulatory capital. DSSM Dummy variable that equals one for the period between 2014 and 2015, which indicates the period after the launch of the SSM: DPILLAR3AM and DIFRS7AM DPILLAR3AM DIFRS7AM Dummy variables that equal one if the company registers a PILLAR3 or IFRS7 score above the sample median of the PILLAR3 and IFRS7 indexes, respectively. . ***, **, and * denote significance at the 1%, 5%, and 10% levels.

Variables:	Coefficient	Predicted Sign	TOTALINDEX		IFRS7INDEX		PILLAR3INDEX
Variables:	Coefficient	Predicted Sign	Coefficient	P-Value	Coefficient	P-Value	Coefficient	P-Value
Intercept	β₀	?	0.331	(0.155)	0.685***	(0.000)	-0.428	(0.364)
SPOWER	β₁	+	0.260**	(0.021)	0.088	(0.286)	0.550**	(0.018)
SIZE	β₂	+	0.016	(0.387)	0.008	(0.496)	0.046	(0.228)
EBT	β₃	?	-3.023*	(0.059)	-1.055	(0.399)	-5.522*	(0.069)
LOANS	β₄	+	0.019***	(0.000)	0.000	(0.968)	0.045***	(0.000)
ΔLOANS	β₅	+	-0.105	(0.107)	-0.072	(0.148)	-0.101	(0.334)
GDP	Β₆	-	0.464*	(0.084)	0.338	(0.123)	0.725	(0.309)
DSSM	Β₇	+	0.011	(0.609)	0.019	(0.222)	0.031	(0.515)
Nº of Observations			240			240		240
Adj-R²			9.06%			5.02%		8.28%

Note. This table presents the results of the following equation: DISCINDEX=β0+β1SPOWER+β2SIZE+β3EBT+β4LOANS+β5ΔLOANS+β6GDP+β7DSSM+ε. All variables are defined in ^{Appendix B} Appendix B - Variable Definitions Variables Definition TOTALINDEX, PILLAR3INDEX, IFRS7INDEX Self-constructed disclosure index that measures a bank’s compliance with both IFRS 7 and Pillar 3, with Pillar 3, or with IFRS 7, respectively. See Appendix A. SPOWER Index based on the measure of supervisory power developed by Barth et al. (2013), which ranges from 0 to 17 based on the World Bank Database 2012 survey on bank regulation and supervision. LLP Ratio of LLPs (loan loss provisions) to total loans. EBT Ratio of earnings before taxes and LLPs to total assets. TIER 1 Tier I capital. NPL Ratio of nonperforming loans to total assets. LOANS Ratio of customers loans to assets. ΔLOANS Loan growth in year t. SIZE The natural logarithm of total assets to control for bank size. GDP Annual growth rate of the gross domestic product for each country. CAP Ratio of actual regulatory capital (primary or Tier I capital) before loan loss reserves to the minimum required regulatory capital. DSSM Dummy variable that equals one for the period between 2014 and 2015, which indicates the period after the launch of the SSM: DPILLAR3AM and DIFRS7AM DPILLAR3AM DIFRS7AM Dummy variables that equal one if the company registers a PILLAR3 or IFRS7 score above the sample median of the PILLAR3 and IFRS7 indexes, respectively. . ***, **, and * denote significance at the 1%, 5%, and 10% levels.

Variables:	Coefficient	Predicted Sign	Coefficient	P-Value	Coefficient	P-Value
Variables:	Coefficient	Predicted Sign	Model 1	P-Value	Model 2	P-Value
Intercept	β0	?	0.112*	(0.064)	0.032	(0.276)
LLP t-1	β1	?	0.176*	(0.059)	0.232**	(0.021)
EBT	β2	+	-0.616	(0.167)	8.847**	(0.022)
CAP	β3	-	-0.002	(0.384)	-0.003*	(0.089)
NPL	β4	+	0.066***	(0.009)	0.067***	(0.007)
LOANS	β5	+	-0.004	(0.777)	0.000	(0.980)
SIZE	β6	+	-0.008*	(0.095)	-0.009*	(0.052)
GDP	β7	-	-0.149***	(0.000)	-0.103***	(0.002)
SPOWER	β8	+			0.115**	(0.032)
SPOWER*EBT	β9	-			-11.701**	(0.023)
Dummy Year			yes		Yes
Nº of Observations			240		240
Adj-R2			36.00%		43.77%

Note. This table presents the results of the following equation: LLPit=α0+β1LLPit−1+β2EBTit++β3CAPit+β4NPLit+β5LOANSit+β6SIZEit+β7GDPit+β8SPOWERit+β9SPOWER*EBTit+εit. All variables are defined in ^{Appendix B} Appendix B - Variable Definitions Variables Definition TOTALINDEX, PILLAR3INDEX, IFRS7INDEX Self-constructed disclosure index that measures a bank’s compliance with both IFRS 7 and Pillar 3, with Pillar 3, or with IFRS 7, respectively. See Appendix A. SPOWER Index based on the measure of supervisory power developed by Barth et al. (2013), which ranges from 0 to 17 based on the World Bank Database 2012 survey on bank regulation and supervision. LLP Ratio of LLPs (loan loss provisions) to total loans. EBT Ratio of earnings before taxes and LLPs to total assets. TIER 1 Tier I capital. NPL Ratio of nonperforming loans to total assets. LOANS Ratio of customers loans to assets. ΔLOANS Loan growth in year t. SIZE The natural logarithm of total assets to control for bank size. GDP Annual growth rate of the gross domestic product for each country. CAP Ratio of actual regulatory capital (primary or Tier I capital) before loan loss reserves to the minimum required regulatory capital. DSSM Dummy variable that equals one for the period between 2014 and 2015, which indicates the period after the launch of the SSM: DPILLAR3AM and DIFRS7AM DPILLAR3AM DIFRS7AM Dummy variables that equal one if the company registers a PILLAR3 or IFRS7 score above the sample median of the PILLAR3 and IFRS7 indexes, respectively. . Models are estimated using pooled OLS with the lag value of LLP and with P-values. ***, **, and * denote significance at the 1%, 5%, and 10% levels.

Variables:	Coefficient	Predicted Sign	Coefficient (P-Value)	P-Value	Coefficient (P-Value)	P-Value	Coefficient (P-Value)	P-Value
Variables:	Coefficient	Predicted Sign	(1)	P-Value	(2)	P-Value	(3)	P-Value
Intercept	β0	?	0.104	(0.130)	0.100*	(0.083)	0.098**	(0.018)
LLP t-1	β1	?	0.162*	(0.092)	0.182**	(0.028)	0.161*	(0.059)
EBT	β2	+	-0.720***	(0.001)	-0.068	(0.671)	-0.320	(0.287)
CAP	β3	-	-0.001	(0.487)	-0.002	(0.295)	-0.001	(0.578)
NPL	β4	+	0.063**	(0.044)	0.065*	(0.055)	0.068***	(0.009)
LOANS	β5	+	-0.002	(0.850)	-0.001	(0.886)	-0.003	(0.800)
SIZE	β6	+	-0.007	(0.187)	-0.007	(0.119)	-0.007**	(0.041)
GDP	β7	-	-0.149**	(0.017)	-0.147**	(0.025)	-0.156***	(0.000)
DSSM	β8	+	-0.006	(0.131)	-
DSSM*EBT	β9	-	0.528***	(0.011)	-
DPILLAR3AM	β10	?			0.010**	(0.028)
DPILLAR3AM*EBT	β11	+			-0.780***	(0.006)
DIFRS7AM	β12	?					0.0142	(0.378)
DIFRS7AM*EBT	β13	+					-1.291	(0.372)
Dummy Year			No		Yes		Yes
Nº of Observations			240		240		240
Adj-R2			36.26%		37.99%		39.53%

Note. This table presents the results of the following equation: LLPit=α0+β1LLPit−1+β2EBTit++β3CAPit+β4NPLit+β5LOANSit+β6SIZEit+β7GDPit+β8DSSMit+β9DSMM*EBTit+β10PILLAR3AMit+β11PILLAR3AM*EBTit+β12IFRS7AMit+β13IFRS7AM*EBTitεit. All variables are defined in ^{Appendix B} Appendix B - Variable Definitions Variables Definition TOTALINDEX, PILLAR3INDEX, IFRS7INDEX Self-constructed disclosure index that measures a bank’s compliance with both IFRS 7 and Pillar 3, with Pillar 3, or with IFRS 7, respectively. See Appendix A. SPOWER Index based on the measure of supervisory power developed by Barth et al. (2013), which ranges from 0 to 17 based on the World Bank Database 2012 survey on bank regulation and supervision. LLP Ratio of LLPs (loan loss provisions) to total loans. EBT Ratio of earnings before taxes and LLPs to total assets. TIER 1 Tier I capital. NPL Ratio of nonperforming loans to total assets. LOANS Ratio of customers loans to assets. ΔLOANS Loan growth in year t. SIZE The natural logarithm of total assets to control for bank size. GDP Annual growth rate of the gross domestic product for each country. CAP Ratio of actual regulatory capital (primary or Tier I capital) before loan loss reserves to the minimum required regulatory capital. DSSM Dummy variable that equals one for the period between 2014 and 2015, which indicates the period after the launch of the SSM: DPILLAR3AM and DIFRS7AM DPILLAR3AM DIFRS7AM Dummy variables that equal one if the company registers a PILLAR3 or IFRS7 score above the sample median of the PILLAR3 and IFRS7 indexes, respectively. . Regressions using GMM estimators are not presented considering the small sample period. ***, **, and * denote significance at the 1%, 5%, and 10% levels.

Disclosures under IFRS 7	Disclose/Do not disclose
The carrying amount of loans and receivables, either on the balance sheet or in the notes (§8)	1/0
Reconciliation of changes in the allowance account, if applicable, for credit losses during the period for each class of financial assets (§16)	1/0
The amount of any impairment loss for each class of financial asset (§20)	1/0
Analysis of the age of financial assets that are past due as of the reporting date but not impaired, by class of financial asset (§37)	1/0
Analysis of financial assets that are individually determined to be impaired on the reporting date (§37)	1/0
Factors the entity considered in determining that they are impaired (§37)	1/0
The criteria the entity uses to determine that there is objective evidence that an impairment loss has occured (B5)	1/0
Disclosures under Pillar 3	Disclose/Do not disclose
Collective and specific impairment losses	1/0
Doubtful loans	1/0
Forbearance	1/0
Impairment losses on loans	1/0
Nonperforming loans	1/0
Past due	1/0

Variables	Definition
TOTALINDEX, PILLAR3INDEX, IFRS7INDEX	Self-constructed disclosure index that measures a bank’s compliance with both IFRS 7 and Pillar 3, with Pillar 3, or with IFRS 7, respectively. See ^{Appendix A} Appendix A - Disclosure Index Disclosures under IFRS 7 Disclose/Do not disclose The carrying amount of loans and receivables, either on the balance sheet or in the notes (§8) 1/0 Reconciliation of changes in the allowance account, if applicable, for credit losses during the period for each class of financial assets (§16) 1/0 The amount of any impairment loss for each class of financial asset (§20) 1/0 Analysis of the age of financial assets that are past due as of the reporting date but not impaired, by class of financial asset (§37) 1/0 Analysis of financial assets that are individually determined to be impaired on the reporting date (§37) 1/0 Factors the entity considered in determining that they are impaired (§37) 1/0 The criteria the entity uses to determine that there is objective evidence that an impairment loss has occured (B5) 1/0 Disclosures under Pillar 3 Disclose/Do not disclose Collective and specific impairment losses 1/0 Doubtful loans 1/0 Forbearance 1/0 Impairment losses on loans 1/0 Nonperforming loans 1/0 Past due 1/0 .
SPOWER	Index based on the measure of supervisory power developed by Barth et al. (2013), which ranges from 0 to 17 based on the World Bank Database 2012 survey on bank regulation and supervision.
LLP	Ratio of LLPs (loan loss provisions) to total loans.
EBT	Ratio of earnings before taxes and LLPs to total assets.
TIER 1	Tier I capital.
NPL	Ratio of nonperforming loans to total assets.
LOANS	Ratio of customers loans to assets.
ΔLOANS	Loan growth in year t.
SIZE	The natural logarithm of total assets to control for bank size.
GDP	Annual growth rate of the gross domestic product for each country.
CAP	Ratio of actual regulatory capital (primary or Tier I capital) before loan loss reserves to the minimum required regulatory capital.
DSSM	Dummy variable that equals one for the period between 2014 and 2015, which indicates the period after the launch of the SSM: DPILLAR3AM and DIFRS7AM
DPILLAR3AM DIFRS7AM	Dummy variables that equal one if the company registers a PILLAR3 or IFRS7 score above the sample median of the PILLAR3 and IFRS7 indexes, respectively.

[1] Responsible Editor:

Prof. Dr. Ilidio Lopes

Brasil

Brasil

The role of banking supervision in credit risk disclosures and loan loss provisions

Abstract

Purpose:

Design/methodology/approach:

Findings:

Originality/value: