Loan loss provisioning and income smoothing in US banks pre and post the financial crisis
AbstractPrior research shows that banks have strong incentives to use loan loss provisions to smooth income. Using a sample of 878 US bank holding companies over the period 2001–2009, I find strong evidence of income smoothing behavior. Additionally, bank holding companies accelerate loan loss provisions to smooth income when (1) banks hit the regulatory minimum target, (2) are in non-recessionary periods, and (3) are more profitable. I also find that bank internally set regulatory capital ratios are relatively more significant than regulatory‐set ratios to trigger income smoothing behaviour using loan loss provisions. Comparing the pre-crisis boom of 2002–2006 with the crisis period of 2007–2009, I find that banks use loan loss provisions more extensively during the crisis period to smooth income upward. Collectively, the results of this paper are relevant to current concerns of accounting standard setters and bank regulators on the current model of loan loss provisioning.
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Bibliographic InfoArticle provided by Elsevier in its journal International Review of Financial Analysis.
Volume (Year): 25 (2012)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/inca/620166
Loan loss provisions; Income smoothing; Financial crisis; Bank holding companies;
Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
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- Balboa, Marina & López-Espinosa, Germán & Rubia, Antonio, 2013. "Nonlinear dynamics in discretionary accruals: An analysis of bank loan-loss provisions," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5186-5207.
- Barakat, Ahmed & Hussainey, Khaled, 2013. "Bank governance, regulation, supervision, and risk reporting: Evidence from operational risk disclosures in European banks," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 254-273.
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