Loan loss provisions in banks – a shock transmission channel from shareholders to subsidiaries?
Dorota Skala  1@  
1 : WNEiZ, University of Szczecin  (University of Szczecin)

In this paper, we investigate loan loss provisions (LLP) in banks as a previously unexplored channel of transmitting shocks between shareholder companies and subsidiary banks. To date, the shock transmission literature concentrated on subsidiary bank loan supply as the main channel of negative shocks, originating from the shareholder level. Using a Central European sample of over 200 banks between 2003-2014, we find that both macroeconomic- and internal shocks on the shareholder company level are connected to changes of loan loss provisions in subsidiary banks. Moreover, these shocks also affect income smoothing processes at the daughter companies. In particular, positive developments in shareholder company macroeconomic environment and financial standing are linked to a boost of LLP and a less intense income smoothing process in subsidiary banks. Pressure on shareholder economies creates incentives for subsidiaries to decrease reserves and intensify income smoothing. In opposition to this, acute drops in shareholder profitability are positively related to subsidiary loan loss provisions, possibly because of the willingness to avoid future capital outflows in case of credit risk increases.

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