Credit Quality, Bank Provisioning and Systematic Risk in Banking Business

Based on a sample of 59 European banks over the period 2006-2011, we investigate the impact of the loan loss provisioning (LLP) together with a wide array of credit-risk ex- posure and performance variables on systematic risk measured by betas. We develop a model for assessing whether management behaviour, accounting policies, such as LLP, and the quality of loan portfolio play a significant role in explaining the banks’ system- atic risk exposure. Our results suggest that financial performances do not have a direct significant relation with betas; rather measures of risk exposures (risk weighted assets on total assets) substantially affect systematic risk. During crisis systematic risk signifi- cantly responsive to provisions and their impacts on performances. Our study has several implications, in particular at light of changing European regula- tion on non-performing exposures reporting and forbearance practices alongside with regulators forcing banks to strengthen their capital base.