scholarly journals Discretionary provisioning practices among Western European banks

2017 ◽  
Vol 9 (1) ◽  
pp. 109-118 ◽  
Author(s):  
Peterson K. Ozili
Keyword(s):  
Financial Crisis ◽  
Credit Risk ◽  
Income Smoothing ◽  
Least Square ◽  
Loan Loss ◽  
Content Type ◽  
Crisis Period ◽  
Loan Loss Provisions ◽  
European Banks ◽  
Western European

Purpose The purpose of the study is to investigate whether discretionary ‘loan loss provisioning’ by Western European banks is driven by income smoothing or credit risk considerations. Design/methodology/approach To test the income smoothing hypothesis, the study uses ordinary least square regression to examine the relation between loan loss provisions and earnings before tax and loan loss provisions in the post-financial crisis period. Findings The authors find evidence that discretionary provisioning by Western European banks is driven by income smoothing incentives in the post-financial crisis period, particularly, among listed banks. Also, it is observed that discretionary provisioning is significantly influenced by credit risk factors, mainly, non-performing loans and loan growth. Also, it is found that discretionary provisioning by Western European banks is procyclical with fluctuations in the economic cycle. Overall, the implication of the findings is that discretionary provisioning among Western European banks is driven by both income smoothing and credit risk considerations. Originality/value This study focus on banks in Western Europe in contrast to prior European studies.

Does the business model influence income smoothing? Evidence from European banks

2019 ◽  
Vol 20 (3) ◽  
pp. 311-330
Author(s):  
Costanza Di Fabio
Keyword(s):  
Business Model ◽  
Balance Sheet ◽  
Income Smoothing ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Country Level ◽  
European Banks ◽  
External Governance

Purpose The purpose of this paper is to explore whether the business model (BM) influences bank income smoothing by considering two competing perspectives, the opportunistic and the information enhancement one. Additionally, the paper addresses the role of auditors’ involvement in national supervision and external governance. Design/methodology/approach Income smoothing is measured by regressing loan loss provisions on unmanaged earnings, and the moderating role of country-level factors is tested employing three-way interactions. The sample consists of European banks observed from 2004 to 2015. Findings Results indicate that the BM affects smoothing and that retail-funded banks exhibit smoother earnings due to informative reasons. National supervisors’ emphasis on audit is positively associated with smoothing by market-oriented banks, whereas external governance constrains smoothing in diversified-retail banks. Research limitations/implications European reforms strengthening monitoring bodies could bring the unintended effect of inducing opportunistic behaviours in market-oriented BMs. However, this study employs indirect proxies for institutional factors and does not consider internal-governance issues. Practical implications Evidence sustains the IASB choice of the expected-loss approach for estimating credit losses as it could enhance the informativeness of retail-funded banks’ accounting numbers. Originality/value This paper contributes to the income smoothing literature by addressing the role of the BM as a whole in explaining smoothing propensity, not limiting the observation to partial features of the balance sheet. Moreover, it supports a counterintuitive argument, the penalty hypothesis, assuming that stronger supervision increases bank incentives to manage earnings to avoid penalties.

scholarly journals Impact of IAS 39 reclassification on income smoothing by European banks

2019 ◽  
Vol 17 (3) ◽  
pp. 537-553
Author(s):  
Peterson K. Ozili
Keyword(s):  
Income Smoothing ◽  
International Accounting ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Before And After ◽  
European Banking ◽  
European Banks ◽  
Ias 39 ◽  
The Impact

Purpose The purpose of this study is to examine the impact of the reclassification of International accounting standard (IAS) 39 on income smoothing using loan loss provisions among European banks. Design/methodology/approach Regression methodology is used to determine the extent of income smoothing using loan loss provisions before and after IAS 39 reclassification. The authors predict that the strict recognition and re-classification requirements of IAS 139 reduced banks’ ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. The authors test this hypothesis over a sample of 114 European banking institutions over the period 2005 to 2013. Findings The findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period. Research limitations/implications The implication of the findings is that the European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income. This implies that the International Accounting Standards Board’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis. Originality/value This study is the first attempt to analyze the effect of IAS 39 re-classification on bank’s ability to smooth income in Europe.

Earnings management and equity incentives: evidence from the European banking industry

2019 ◽  
Vol 27 (2) ◽  
pp. 244-261 ◽  
Author(s):  
Mohammad Alhadab ◽  
Bassam Al-Own
Keyword(s):  
Earnings Management ◽  
Management Practices ◽  
Banking Industry ◽  
Future Research ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Equity Incentives ◽  
European Banking ◽  
European Banks

Purpose This study aims to examine the effect of equity incentives on earnings management that occurs via the use of loan loss provisions by using a sample of 204 bank-year observations over the period 2006-2011. Design/methodology/approach The authors use the data of 39 European banks to test the main hypothesis. Several valuation models and regressions are used to measure the main proxies for executives’ compensation and the determinant factors of loan loss provisions. Findings The empirical results reveal that earnings management that occurs via discretionary loan loss provisions is associated with equity incentives in the banking industry. In particular, European banks’ executives with high equity incentives are found to manage reported earnings upwards by reducing loan loss provisions. The results therefore show that income-increasing earnings management via discretionary loan loss provisions is widely practised by the executives of European banks and that this is partly motivated by executives’ compensation. Practical implications The findings of this paper present important implications for regulators in the European Union, who should take further steps to reform the regulatory environment to monitor and mitigate the earnings management practices that occur via the manipulation of loan loss provisions. Earnings management practices do not just negatively affect subsequent performance but are also found to lead to firms’ failure. Thus, regulators should take the necessary reforms to protect the wealth of stakeholders (investors, creditors, etc.). Originality/value This study provides the first evidence on the relationship between equity incentives and earnings management in the European banking industry. The study sheds more light on an issue of great interest to a broad audience that does not receive much attention in the prior research, thus opening new avenues for future research.

SEC Supervisory Activity in the Financial Industry

2018 ◽  
Vol 35 (3) ◽  
pp. 607-636 ◽  
Author(s):  
Angela Pettinicchio
Keyword(s):  
Financial Crisis ◽  
Financial Institutions ◽  
Historical Data ◽  
Financial Industry ◽  
Loan Loss ◽  
Crisis Period ◽  
Research Division ◽  
Loan Loss Provisions ◽  
Asymmetric Attitude ◽  
The Way

This study documents a higher incidence of SEC Comment Letters among financial institutions characterized by abnormal levels of loan loss provisions (LLPs). In particular, results show that this effect is stronger for banks overestimating LLPs, suggesting an asymmetric attitude of the SEC Research Division toward overestimations compared with LLPs underestimations, especially in the pre-financial crisis period. Finally, the study demonstrates that after receiving a Comment Letter by the SEC, financial institutions change the way they account for LLPs by basing their computation more on historical data, thereby reducing the level of discretion embedded in their calculation.

The determinants of bank profitability: empirical evidence from European banking sector

2016 ◽  
Vol 14 (1) ◽  
pp. 86-115 ◽  
Author(s):  
Elisa Menicucci ◽  
Guido Paolucci
Keyword(s):  
Banking Sector ◽  
Developed Countries ◽  
Policy Implications ◽  
Loan Loss ◽  
Data Set ◽  
Bank Profitability ◽  
Content Type ◽  
Loan Loss Provisions ◽  
European Banking ◽  
European Banks

Purpose The purpose of this paper is to investigate the relationship between bank-specific characteristics and profitability in European banking sector to find the role of internal factors in achieving high profitability. Design/methodology/approach A regression analysis is built on an unbalanced panel data set comprising 175 observations of 35 top European banks over the period 2009-2013. To this end, the empirical data are collected from Bankscope and a comprehensive set of internal characteristics is examined. Findings All the determinant variables included in the model have statistically significant impacts on European banks’ profitability. However, the effects are not uniform across profitability measures. Regression findings reveal that size and capital ratio are significant company-level determinants of bank profitability in Europe, while higher loan loss provisions result in lower profitability levels. Findings also suggest that banks with higher deposits and loans ratio tend to be more profitable but the effects on profitability are statistically insignificant in some cases. Practical implications This study has considerable policy implications, as the performance of the European banking sector depends on its efficiency, profitability and competitiveness. In view of these findings, some suggestions may be functional for bank regulatory authorities to intensify and sustain robustness and stability of the banking sector. Originality/value The results provide interesting insights into the characteristics and practices of profitable banks in Europe. Few econometric studies have empirically explored the determinants of bank profitability in Europe so far, even though similar studies have been conducted in several developed countries. Therefore, this paper tries to close an important gap in the existing literature improving the understanding of bank profitability in Europe.

Income smoothing behavior and the procyclical effect of loan loss provisions in Islamic banks

2019 ◽  
Vol 10 (1) ◽  
pp. 21-34 ◽  
Author(s):  
Sigid Eko Pramono ◽  
Hilda Rossieta ◽  
Wahyoe Soedarmono
Keyword(s):  
Fixed Effect Model ◽  
Income Smoothing ◽  
Islamic Banks ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Risk Increase ◽  
Effect Model ◽  
Prior Literature ◽  
Loan Growth

Purpose This study aims to test whether loan loss provisions in Islamic banks is procyclical by explicitly examining the link between non-discretionary provisions and loan growth. In the next stage, this paper tests whether the link between non-discretionary provisions and loan growth is conditional on bank capitalization and lending. This is to identify whether bank-specific factors affect the procyclicality of non-discretionary provisions and whether such procyclicality can be explained by income smoothing in banks with different capitalization and loan profiles. Design/methodology/approach This study is conducted in four stages. The first stage identifies the determinants of loan loss provisions. The second stage investigates whether income smoothing is affected by capitalization and lending activities. In the third stage, the link between non-discretionary provisions and loan growth is examined. In the fourth stage, this paper tests whether the link between non-discretionary provisions and loan growth is affected by bank capitalization and lending. A two-way panel-fixed effect model is used. Findings Non-discretionary provisions are procyclical, particularly for banks with lower capitalization and lending activities, because such banks do not conduct income smoothing. Specifically, banks with lower capitalization experience a decline in loan growth when non-discretionary provisions to cover credit risk increase. Research limitations/implications The dataset used in this study follows Soedarmono et al. (2017) and does not enable to differentiate types of financing products in Islamic banks that may exacerbate or mitigate the procyclicality of non-discretionary provisions. Originality/value This paper extends prior literature on the procyclicality of loan loss provisions by specifically investigating the influence of non-discretionary provisions on loan growth in Islamic banks and whether such relationship depends on the role of income smoothing undertaken by banks with different levels of capitalization and lending. This paper builds on the work of Soedarmono et al. (2017) in which they do not explicitly examine the relationship between loan loss provisions and loan growth.

scholarly journals Banking sector earnings management using loan loss provisions in the Fintech era

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Peterson K. Ozili
Keyword(s):  
Earnings Management ◽  
Banking Sector ◽  
Income Smoothing ◽  
Loan Loss ◽  
Content Type ◽  
Eu Countries ◽  
Loan Loss Provisions ◽  
Country Level ◽  
Show Evidence ◽  
Second Wave

PurposeThis paper analyzes banking sector earnings management using loan loss provisions (LLPs) in the Fintech era.Design/methodology/approachRegression methodology was used to examine earnings management in the Fintech era.FindingsThe findings show evidence for bank income smoothing using LLPs. There is greater income smoothing in the second-wave Fintech era compared to the first-wave Fintech era, and the presence of strong institutions did not lower income smoothing in the second-wave era. Bank income smoothing is also greater in (1) Bank of International Settlement (BIS) and EU countries than in non-EU countries and G7 countries, (2) well-capitalized banking sectors and (3) during economic booms in the second-wave Fintech era.Practical implicationsThe competition for loans and deposits by banks and Fintech lenders in the second-wave Fintech era created additional incentives for banks to engage in income smoothing to report competitive and stable earnings.Originality/valueThe study uses a unique approach to detect country-level earnings management in the banking sector. Also, this study extends the bank earnings management literature by introducing the Fintech era as a determinant of the extent of bank earnings management.

scholarly journals Bank loan loss provisioning during election years: cross-country evidence

2019 ◽  
Vol 16 (4) ◽  
pp. 413-431
Author(s):  
Peterson K. Ozili
Keyword(s):  
Banking Sector ◽  
Developed Countries ◽  
Income Smoothing ◽  
Bank Loan ◽  
Loan Loss ◽  
Political Factors ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Provisioning Behavior ◽  
The Eu

Purpose The purpose of this paper is to examine bank loan loss provisioning behavior during election years – focusing on the effect of elections on banking sector loan loss provisioning. Design/methodology/approach Regression analysis was used to analyze the behavior of bank loan loss provisioning in developed countries during election years. Findings The findings reveal that the banking sectors in developed countries have higher loan loss provisions (LLPs) in election years. Also, income smoothing is present in election years which supports the income smoothing hypothesis. Also, banking sectors with high capital levels have higher LLPs. Although, there were no significant differences in bank loan loss provisioning during election years across the four bloc, the EU banking sectors and the banking sectors of BIS member countries generally have higher LLPs while the non-EU banking sectors and the banking sectors of the G7 member countries generally have fewer LLPs. Originality/value The literature has not explored the effect of political factors such as “election-year risk” on the managers’ discretion in banks. This is the first study that explores the effect of political change on managerial discretion in banks.

scholarly journals IAS 39, income smoothing, and pro-cyclicality: evidence from Hong Kong banks

2016 ◽  
Vol 8 (1) ◽  
pp. 80-94 ◽  
Author(s):  
Azira Abdul Adzis ◽  
David W.L. Tripe ◽  
Paul Dunmore
Keyword(s):  
Hong Kong ◽  
East Asia ◽  
Financial Reporting ◽  
Income Smoothing ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Ias 39 ◽  
Cyclical Behavior ◽  
East Asia Region

Purpose The purpose of this study is to investigate the impact of International Accounting Standard 39 (IAS 39) on income-smoothing activities and pro-cyclical behavior through loan loss provisions using a sample of Hong Kong banks. Design/methodology/approach Fixed effects estimator is used, and the analysis covers the period from 2000 to 2009. Findings The results suggest that Hong Kong banks engage less in income-smoothing activity after they comply with the IAS 39. No evidence supports loan loss provisions of Hong Kong banks exhibiting more pro-cyclical behavior after IAS 39 adoption. Research limitations/implications Compliance with IAS 39 should improve the quality of bank financial reporting. The reduction in income-smoothing activities among Hong Kong banks after IAS 39 adoption fairly supports the effectiveness of International Financial Reporting Standard (IFRS) and countries that have yet to comply with IFRS may take action to apply the standards. Bank regulators should take pro-active action in addressing the issue of pro-cyclicality of loan loss provisions, as IAS 39 focuses more on improving the financial information quality, while pro-cyclicality is associated with the economic cycles. Originality/value Hong Kong banking industry is unique, as it was among the first IFRS adopters in the East Asia region and it has its own legal framework for developing accounting standards. The results of this study are expected to shed some light on the effects of IAS 39 adoption on income smoothing and pro-cyclicality of banks in the East Asia region, where the accounting cultural value dimensions and institutional structures are different than that of European countries.

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