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Bank earnings management through loan loss provisions: a double-edged sword?

  • Lars Norden
  • Anamaria Stoian
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    We investigate whether banks use of loan loss provisions (LLPs) to manage the level and volatility of their earnings and examine the implications for bank risk. We find that banks use LLPs to manage the level and volatility of earnings downward when they are abnormally high and when expected dividends are lower than current earnings. Moreover, banks adjust LLPs to avoid fluctuations in their risk-weighted assets. Our findings highlight an important tradeoff in the provisioning for expected and unexpected losses that affects bank risk and profitability.

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    File URL: http://www.dnb.nl/en/binaries/working%20Paper%20404_tcm47-301517.pdf
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    Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 404.

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    Date of creation: Dec 2013
    Date of revision:
    Handle: RePEc:dnb:dnbwpp:404
    Contact details of provider: Postal: Postbus 98, 1000 AB Amsterdam
    Web page: http://www.dnb.nl/en/

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