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Earnings and Capital Management in Alternative Loan Loss Provision Regulatory Regimes

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  • Daniel Perez
  • Vicente Salas-Fumas
  • Jesus Saurina

Abstract

Accounting scholars and policy-makers have expressed concern about the quality of accounting data. Because earnings and capital management practices alter the information content of accounting statements, we ask whether a transparent smoothing device such as the statistical provision - a counter-cyclical bank loan loss provision that increases in economic upturns and decreases in downturns, and is reported separately by banks - may contribute to improving quality of accounting data. We find that Spanish banks use loan loss provisions to smooth earnings but we find no evidence that they practice capital management. We also find that credit risk variables weigh more and net operating income weighs less as determinants of generic and specific loan loss provisions after the introduction of the statistical provision than they did before this provision was introduced. Therefore, the quality of banks' accounting statements improves upon use of the new statistical provision.

Suggested Citation

  • Daniel Perez & Vicente Salas-Fumas & Jesus Saurina, 2008. "Earnings and Capital Management in Alternative Loan Loss Provision Regulatory Regimes," European Accounting Review, Taylor & Francis Journals, vol. 17(3), pages 423-445.
  • Handle: RePEc:taf:euract:v:17:y:2008:i:3:p:423-445
    DOI: 10.1080/09638180802016742
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    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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