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 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.