Bank loan-loss accounting: a review of theoretical and empirical evidence
The philosophy underlying a bank's accounting for loan losses might have a material effect on the net income the firm reports to investors, which is a concern for securities regulators. A bank's loan-loss accounting philosophy might also significantly affect its ability to absorb unexpected future losses, which is a concern for bank supervisors. For example, a bank that follows a conservative loan-loss philosophy (maintains a higher loan-loss allowance) may be better able to absorb unexpected losses but also may have more freedom to manage reported earnings. This article focuses on the extent to which securities regulators and bank supervisors should be concerned about banks' accounting. ; The authors' conclusion is that neither the bank supervisors' nor the securities regulators' concern is as serious as it may seem at first glance. Using currently available data, investors can and do form estimates of the "economically true" amount of banks' loan-loss allowances, provisions, net income, and equity capital. Strict adherence to Securities and Exchange Commission guidelines may improve the quality of the data, but the guidelines may not eliminate the benefit or reduce the cost of investors' making their own estimates. However, bank supervisors have the authority to require banks to hold additional equity capital if the bank's loan-loss allowance is judged inadequate to absorb future losses.
Volume (Year): (2000)
Issue (Month): Q2 ()
|Contact details of provider:|| Postal: 1000 Peachtree St., N.E., Atlanta, Georgia 30309|
Web page: http://www.frbatlanta.org/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Persons, John C., 1997. "Liars Never Prosper? How Management Misrepresentation Reduces Monitoring Costs," Journal of Financial Intermediation, Elsevier, vol. 6(4), pages 269-306, October.
- Bruner, Robert F & Simms, John M, Jr, 1987. "The International Debt Crisis and Bank Security Returns in 1982," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 46-55, February.
- François Degeorge & Jayendu Patel & Richard Zeckhauser, 1997.
"Earnings Management to Exceed Thresholds,"
- Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
- Moyer, Susan E., 1990. "Capital adequacy ratio regulations and accounting choices in commercial banks," Journal of Accounting and Economics, Elsevier, vol. 13(2), pages 123-154, July.
- Holthausen, Robert W. & Larcker, David F. & Sloan, Richard G., 1995. "Annual bonus schemes and the manipulation of earnings," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 29-74, February.
- Wall, Larry D. & Peterson, David R., 1987. "The effect of capital adequacy guidelines on large bank holding companies," Journal of Banking & Finance, Elsevier, vol. 11(4), pages 581-600, December.
- Jeremy C. Stein, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 655-669.
- Beaver, William H. & Engel, Ellen E., 1996. "Discretionary behavior with respect to allowances for loan losses and the behavior of security prices," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 177-206, October.
- Guidry, Flora & J. Leone, Andrew & Rock, Steve, 1999. "Earnings-based bonus plans and earnings management by business-unit managers1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 113-142, January.
- Edward J. Kane, 1997.
"Ethical Foundations of Financial Regulation,"
NBER Working Papers
6020, National Bureau of Economic Research, Inc.
- John R. Walter, 1991. "Loan loss reserves," Economic Review, Federal Reserve Bank of Richmond, issue Jul, pages 20-30.
- Timothy W. Koch & Larry D. Wall, 2000. "The use of accruals to manage reported earnings: theory and evidence," FRB Atlanta Working Paper 2000-23, Federal Reserve Bank of Atlanta.
- Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
When requesting a correction, please mention this item's handle: RePEc:fip:fedaer:y:2000:i:q2:p:1-20:n:v.85no.2. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector)
If references are entirely missing, you can add them using this form.