Business Cycle Effects on Commercial Bank Loan Portfolio Performance in Developing Economies

30 Pages Posted: 5 Feb 2011

See all articles by Camilo Mondragon-Velez

Camilo Mondragon-Velez

International Finance Corporation - World Bank Group

Jack D. Glen

International Finance Corporation (IFC)

Date Written: January 31, 2011

Abstract

This paper studies the business cycle effects on the performance of commercial bank loan portfolios across major developing economies in the period 1996-2008. We measure loan performance via loan loss provisions (that is, recognized expenses related to expected losses in bank income statements). Our results indicate that while economic growth is the main driver of loan portfolio performance, interest rates have second-order effects. Furthermore, we find the relationship between loan loss provisions and economic growth to be highly non-linear only under extreme economic stress: GDP growth needs to decline by more than 6 percentage points (pp, in absolute terms) in order to generate an increase in loan loss provisions equivalent to the median emerging market bank profitability; while a decline of more than 10 pp in growth implies significant capital losses, of at least 20 percent, for the median emerging market bank. In addition, we find higher loan loss provisions are associated with private sector leverage, poor loan portfolio quality, and lack of banking system penetration and capitalization.

Keywords: Bank Loan Portfolio, Loan Loss Provisions, Loan Loss Reserves, Lending Rate, Developing Economies, Business Cycle

JEL Classification: E44, G21, O16

Suggested Citation

Mondragon-Velez, Camilo and Glen, Jack Dean, Business Cycle Effects on Commercial Bank Loan Portfolio Performance in Developing Economies (January 31, 2011). Available at SSRN: https://ssrn.com/abstract=1754672 or http://dx.doi.org/10.2139/ssrn.1754672

Camilo Mondragon-Velez (Contact Author)

International Finance Corporation - World Bank Group ( email )

2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States

Jack Dean Glen

International Finance Corporation (IFC) ( email )

2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States
202-473-8641 (Phone)

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