Earnings and Capital Management in Alternative Loan Loss Provision Regulatory Regimes

By Daniel Pérez, Vicente Salas-Fumás, Jesús Saurina. 2006

229 citations recorded by the source corpus.

Accounting scholars and policy-makers have expressed concern about the quality of accounting data. Because earnings and capital management practices alter the information content of accounting statements, we ask whether a transparent smoothing device such as the statistical provision – a counter-cyclical bank loan loss provision that increases in economic upturns and decreases in downturns, and is reported separately by banks – may contribute to improving quality of accounting data. We find that Spanish banks use loan loss provisions to smooth earnings but we find no evidence that they practice capital management. We also find that credit risk variables weigh more and net operating income weighs less as determinants of generic and specific loan loss provisions after the introduction of the statistical provision than they did before this provision was introduced. Therefore, the quality of banks' accounting statements improves upon use of the new statistical provision.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/3ab7f2897052dfe95d8908deb62f1341b916729c

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Citations in the corpus

Bank earnings and regulatory capital management using available for sale securities (2017, unknown): “The evidence relating to banks using the loan loss provision to manage regulatory capital is more consistent (Moyer 1990; Beatty et al. 1995; Ahmed et al. 1999; Pérez et al. 2008).”
Mitigating the pro-cyclicality of basel II (2010, unknown): “See Beatty et al. (1995), Ahmed et al. (1999), and Pérez et al. (2008), among many others.”
Loan Loss Provisions, Earnings Management and Capital Management under IFRS: The Case of EU Commercial Banks (2011, methodology): “Similar to Perez et al. (2008) we include the natural logarithm of total assets as a control variable for bank size.”
Earnings and capital management and signaling: the use of loan-loss provisions by European banks (2015, background): “For further details on the dynamic provisioning system adopted in Spain, see Perez, Salas, and Saurina (2008) and Fernández de Lis, Martínez, and Saurina (2000).”
Earnings management behaviors under different monitoring mechanisms: The case of Islamic and conventional banks (2016, unknown): “S. bank samples arrive at similar conclusions (Anandarajan et al., 2007; Perez et al., 2008).”
Do Islamic banks use loan loss provisions to smooth their results (2010, methodology): “The correlation between loan loss provisions and GDP growth is also negative, suggesting an anti-business cyclical behavior of bank‟s loan loss provisioning (Perez et al., 2006).”