Discretionary Provisioning Practices among Western European Banks

The purpose of this study is to investigate whether discretionary provisioning by Western European banks is driven by income smoothing or credit risk considerations. We find evidence that discretionary provisioning by Western European banks is driven by income smoothing incentives in the post-financial crisis period, particularly, among listed banks. Also, we observe that discretionary provisioning is significantly influenced by credit risk factors, mainly, non-performing loans and loan growth. Also, we find that discretionary provisioning by Western European banks is procyclical with fluctuations in the economic cycle. Overall, the implication of the findings is that discretionary provisioning among Western European banks is driven by both income smoothing and credit risk considerations