What drives discretionary loan loss provisions? The role of banks' business model, listing status and COVID-19 crisis in the European banking sector

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 per-formed 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, originate to 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.