Purpose: This study examines whether banks’ business models and listing status
drive the discretionary use of loan loss provisions (LLPs) under the International
Financial Reporting Standard (IFRS) 9 “Financial Instruments”.
Design/methodology/approach: Ordinary least squares regression is performed
on a sample of 5,147 listed and unlisted European banks for the 2018-2021 period.
Findings: The main results show that after Expected Credit Loss (ECL) implementation,
banks are prone to manage their earnings via LLPs. In detail, originateto-
hold and listed banks use LLPs to manage their earnings more strongly than originate-
to-distribute and unlisted banks. Further, during the financial crisis due to the
COVID-19 pandemic, European banks tended to manage earnings more than during
the pre-crisis period.
Originality/value: This study contributes to the existing literature by expanding
research on LLPs and highlighting ex-ante factors that might influence banks’ provisioning
behavior, such as their listing status and business model.
Practical implications: This study provides useful insights for regulators and
accounting setters in making informed decisions regarding provisioning policies,
even during periods of turmoil.
Keywords: loan loss provisions, business model, listing status, earnings management.
Allini A., Meucci F., Spagnuolo F., Zampella A. (2023). What drives discretionary loan loss provisions? The role of banks’ business model, listing status and COVID-19 crisis in the European banking sector, Financial Reporting, 2, 71-96. Doi: 10.3280/FR2023-002003
