An Empirical Analysis of the Determinants of Provisions for Loans Losses in Portuguese Banks

This paper aims to analyse the determinants of Portuguese banks' provisions for loan losses. The approach followed was to estimate an equation whose dependent variable is the reported change in the value of a loan portfolio (provisions net of recoveries) using as explanatory variables the economic determinants of the changes in the market value of such portfolio. One of the strongest results from this study is that public banks' provision ratios of doubtful loans are, on average, 2.3% above those of the other banks. Banks found to be associated with higher reported losses are those with high net interest margins, high market share on loans and low loan to asset ratios. High levels of interest rates in the economy were also found to boost reported loan losses. The long-run effect of the GDP growth rate on provisions (net of recoveries) is positive, which constitutes an indication of the possible use of provisions as an income-smoothing device.N/