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Determinants of bank income smoothing using loan loss provisions in the United Kingdom

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  • Ozili, Peterson K

Abstract

This paper investigates the determinants of bank income smoothing using loan loss provisions in the United Kingdom from 1999 to 2017. The findings show that UK banks use loan loss provisions for income smoothing purposes. Income smoothing is greater in times of high economic policy uncertainty. The extent of bank income smoothing is reduced by foreign bank presence, UK GAAP adoption, IFRS9 adoption, and high levels of voice and accountability. Also, there is reduced income smoothing using loan loss provisions during a financial crisis and in periods of economic prosperity. The implication is that economic conditions, institutional governance and accounting disclosure rules influence the extent of bank income smoothing in the United Kingdom. The findings of the study contribute to several studies that explore the determinants of bank income smoothing in a single country context.

Suggested Citation

  • Ozili, Peterson K, 2022. "Determinants of bank income smoothing using loan loss provisions in the United Kingdom," MPRA Paper 112047, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:112047
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    References listed on IDEAS

    as
    1. Lepetit, Laetitia & Strobel, Frank, 2015. "Bank insolvency risk and Z-score measures: A refinement," Finance Research Letters, Elsevier, vol. 13(C), pages 214-224.
    2. Ozili, Peterson K, 2017. "Discretionary Provisioning Practices among Western European Banks," MPRA Paper 92645, University Library of Munich, Germany.
    3. Ozili, Peterson K, 2019. "Impact of IAS 39 reclassification on Income Smoothing by European Banks," MPRA Paper 92098, University Library of Munich, Germany.
    4. Peterson K. Ozili & Erick Outa, 2017. "Bank loan loss provisions research: A review," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 17(3), pages 144-163, September.
    5. Robert Lensink & Aljar Meesters, 2014. "Institutions and Bank Performance: A Stochastic Frontier Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(1), pages 67-92, February.
    6. Egor Nikulin & Jeff Downing, 2021. "Loan-loss provisions, earnings management, and capital management by Russian banks: the impact of changes in banking regulation and oversight," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 11(4), pages 659-677, December.
    7. Peterson K. Ozili, 2019. "Bank loan loss provisioning during election years: cross-country evidence," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 16(4), pages 413-431, December.
    8. Peterson K. Ozili, 2019. "Impact of IAS 39 reclassification on income smoothing by European banks," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 17(3), pages 537-553, September.
    9. Caner Bakir, 2013. "Bank Behaviour and Resilience," Palgrave Macmillan Studies in Banking and Financial Institutions, Palgrave Macmillan, number 978-1-137-30816-0, September.
    10. Ozili, Peterson K & Outa, Erick R, 2018. "Bank Income Smoothing in South Africa: Role of Ownership, IFRS and Economic fluctuation," MPRA Paper 102567, University Library of Munich, Germany.
    11. Hu, Shiwei & Gong, Di, 2019. "Economic policy uncertainty, prudential regulation and bank lending," Finance Research Letters, Elsevier, vol. 29(C), pages 373-378.
    12. An, Zhe & Li, Donghui & Yu, Jin, 2016. "Earnings management, capital structure, and the role of institutional environments," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 131-152.
    13. Bouvatier, Vincent & Lepetit, Laetitia & Strobel, Frank, 2014. "Bank income smoothing, ownership concentration and the regulatory environment," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 253-270.
    14. El Sood, Heba Abou, 2012. "Loan loss provisioning and income smoothing in US banks pre and post the financial crisis," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 64-72.
    15. Ozili, Peterson K, 2019. "Bank loan loss provisioning during election years in Nigeria," MPRA Paper 96704, University Library of Munich, Germany.
    16. Doan, Anh-Tuan & Lin, Kun-Li & Doong, Shuh-Chyi, 2020. "State-controlled banks and income smoothing. Do politics matter?," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    17. Viral V. Acharya & Bart M. Lambrecht, 2015. "A Theory of Income Smoothing When Insiders Know More Than Outsiders," The Review of Financial Studies, Society for Financial Studies, vol. 28(9), pages 2534-2574.
    18. Ozili, Peterson K, 2017. "Bank Loan Loss Provisions Research: A Review," MPRA Paper 76495, University Library of Munich, Germany.
    19. Manthos D. Delis & Sotirios Kokas & Steven Ongena, 2017. "Bank Market Power and Firm Performance," Review of Finance, European Finance Association, vol. 21(1), pages 299-326.
    20. Fonseca, Ana Rosa & González, Francisco, 2008. "Cross-country determinants of bank income smoothing by managing loan-loss provisions," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 217-228, February.
    21. Peterson K. Ozili, 2017. "Discretionary provisioning practices among Western European banks," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 9(1), pages 109-118, April.
    22. Andries, Kathleen & Gallemore, John & Jacob, Martin, 2017. "The effect of corporate taxation on bank transparency: Evidence from loan loss provisions," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 307-328.
    23. Jiang, Haiyan & Habib, Ahsan & Wang, Snow, 2018. "Real Earnings Management, Institutional Environment, and Future Operating Performance: An International Study," The International Journal of Accounting, Elsevier, vol. 53(1), pages 33-53.
    24. Ozili, Peterson K, 2018. "Bank Loan Loss Provisions, Investor Protection and the Macroeconomy," MPRA Paper 80281, University Library of Munich, Germany.
    25. Danisman, Gamze Ozturk & Demir, Ender & Ozili, Peterson, 2021. "Loan loss provisioning of US banks: Economic policy uncertainty and discretionary behavior," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 923-935.
    26. Jamal Abu-Serdaneh, 2018. "Bank loan-loss accounts, income smoothing, capital management, signaling and procyclicality," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 16(4), pages 677-693, December.
    27. Ozili, Peterson K, 2017. "Bank Loan Loss Provisions, Investor Protection and the Macroeconomy," MPRA Paper 80147, University Library of Munich, Germany.
    28. Ozili, Peterson K, 2019. "Impact of IAS 39 reclassification on income smoothing by European banks," MPRA Paper 97035, University Library of Munich, Germany.
    29. Hakim Ben Othman & Hounaida Mersni, 2014. "The use of discretionary loan loss provisions by Islamic banks and conventional banks in the Middle East region," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 31(1), pages 106-128, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    banks; earnings management; United Kingdom; loan loss provisions; income smoothing; economic policy uncertainty; Great Britain; accounting disclosure; financial crisis.;
    All these keywords.

    JEL classification:

    • 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
    • M0 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

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