Drivers of Credit Losses in Australasian Banking

Abstract

Based on a comprehensive dataset retrieved from original financial reports of 32 Australasian banks (1980-2005), this paper explores factors affecting the credit loss experience of these institutions. It is found that the state of economy as measured by GDP growth and unemployment rate have the expected impact. Asset markets are also important, with the performance of the equity market showing greater explanatory power than property prices. Larger banks, on average, provide more for credit losses while less efficient banks have greater asset quality problems. Strong loan growth translates into significantly higher credit losses with a lag of 2-3 years. Finally, the results show strong evidence of income smoothing activities by banks.

Keywords: Banking, Credit Risk, Loan Loss Provisions, Australia, New Zealand

JEL Classification: G20, G21