Banks' off-balance sheet manipulations

In this study, we deploy various methods for analyses of digits and provide rigorous empirical evidence that most banks’ off-balance sheet items have partial conformity to Benford’s law in their first leading (significant) digits. The accounting records also show scarce compliance with Benford’s law in their second leading digits. Most of these banking activities emerge with values that are downward manipulated at several percentages and excessive rounding, with disproportionate usage of 0 and 5 in their last three digits, regardless of whether the items are traded on designated exchanges, handled only Over-the-Counter, or represent business relationships between commercial banks and customers. Overall, we expose here widespread though modest artificial deflation in the recorded values of banks’ OBS items and a unique phenomenon of significant overuse of the numbers 0 and 5 in different digits, with strong violations of Benford’s law. We further notice that, for the majority of banks’ off-balance sheet items, key regulatory developments, such as the three Basel Accords, present meaningful and continuous impact on the overall reduction in the anomalous appearances of the numbers 5 in the first and 0 and 5 in the second leading digits. At present, however, we still observe irregular spreads (well above the norm) of the numbers 0 and 5 in the second leading digits.