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Earnings and capital management in alternative loan loss provision regulatory regimes

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Author Info
Daniel Pérez () (Banco de España)
Vicente Salas-Fumás () (Banco de España, Universidad de Zaragoza)
Jesús Saurina () (Banco de España)
Abstract

The paper sets an accounting and behavioral framework from which we derive a reduced form equation to test income smoothing and capital management practices through loan loss provisions (PLL) by Spanish banks. Spain offers a unique environment to perform those tests because there are very detailed rules to set aside loan loss provisions and they are not counted as regulatory capital. Using panel data econometric techniques, we find evidence of income smoothing through PLL but not of capital management. The paper draws some lessons for accounting rule setters and banking regulators regarding the current changes in the accounting framework (introduction of IFRS/IAS in Europe) as well as the new capital framework (Basel II). In particular, a very detailed set of rules to set aside loan loss provisions does not prevent managers from decreasing earnings volatility, similarly to what happens in a more principles oriented accounting framework.

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/06/Fic/dt0614e.pdf
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Publisher Info
Paper provided by Banco de España in its series Banco de España Working Papers with number 0614.

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Length: 33 pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:bde:wpaper:0614

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Related research
Keywords: income smoothing; capital management; ifrs/ias; basel ii;

Find related papers by JEL classification:
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

This paper has been announced in the following NEP Reports:

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