Income Smoothing and Procyclicality of Loan Loss Provisions in Central European Banks

2013 ◽  
Author(s):  
Dorota Skala
Keyword(s):  
Income Smoothing ◽  
Loan Loss ◽  
Central European ◽  
Loan Loss Provisions ◽  
European Banks

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.

Loan Loss Provisions, Income Smoothing and Loan Growth: Evidence from Islamic Banks

2016 ◽  
Author(s):  
Sigid Eko Pramono ◽  
Hilda Rosieta ◽  
Wahyoe Soedarmono
Keyword(s):  
Income Smoothing ◽  
Islamic Banks ◽  
Loan Loss ◽  
Loan Loss Provisions ◽  
Loan Growth
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