1 Credit quality, bank provisioning and systematic risk in banking business Josanco Floreani * , Maurizio Polato † , Andrea Paltrinieri ‡ and Flavio Pichler § Abstract 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. Keywords: Non-performing Loans, Loan Loss Provisioning, Cost of Capital, Banks JEL Classification: G21, G32 * Josanco Floreani is Lecturer in Banking and Finance, University of Udine, Department of Economics and Statistics, Via Tomadini 30/A – 33100 Udine; mail: josanco.floreani@uniud.it ; phone: +39 0432249353. † Maurizio Polato is Full Professor in Banking and Finance, University of Udine, Department of Econom- ics and Statistics, Via Tomadini 30/A – 33100 Udine; mail: maurizio.polato@uniud.it ; phone: +39 0432249315. ‡ Andrea Paltrinieri is Lecturer in Banking and Finance, University of Udine, Department of Economics and Statistics, Via Tomadini 30/A – 33100 Udine; mail: andrea.paltrinieri@uniud.it; phone: +39 0432249317. § Flavio Pichler is Associate Professor in Banking and Finance, University of Verona, Department of Business Administration, Via dell'Artigliere, 19 - 37129 Verona; mail: flavio.pichler@univr.it; phone: +39 0458028273.