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Loan loss reserves, accounting constraints, and bank ownership structure

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  • Eliana Balla
  • Morgan J. Rose

Abstract

This paper examines how the tightening of accounting constraints associated with the SunTrust bank decision in 1998 impacted the loan loss reserve policies of banks differently based on ownership structure. The SunTrust case, the result of an SEC inquiry over possible overstating of loan loss reserves, represented a strengthening of accounting priorities, which stress the importance of the reserve account for financial statement objectivity and comparability, relative to supervisory priorities, which emphasize the role of reserves for bank solvency through changing economic environments. The evidence presented indicates that publicly held banks, which fall directly under the SECs purview, reduced their loan loss reserve and provisions relative to privately held banks. Evidence also indicates that the positive relationship between bank earnings and provisions weakened, consistent with a reduction in either earnings management or early recognition of losses.

Suggested Citation

  • Eliana Balla & Morgan J. Rose, 2011. "Loan loss reserves, accounting constraints, and bank ownership structure," Working Paper 11-09, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:11-09
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    References listed on IDEAS

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    6. John R. Walter, 1991. "Loan loss reserves," Economic Review, Federal Reserve Bank of Richmond, issue Jul, pages 20-30.
    7. Benston, George J. & Wall, Larry D., 2005. "How should banks account for loan losses," Journal of Accounting and Public Policy, Elsevier, vol. 24(2), pages 81-100.
    8. Ahmed, Anwer S. & Takeda, Carolyn & Thomas, Shawn, 1999. "Bank loan loss provisions: a reexamination of capital management, earnings management and signaling effects," Journal of Accounting and Economics, Elsevier, vol. 28(1), pages 1-25, November.
    9. Foos, Daniel & Norden, Lars & Weber, Martin, 2010. "Loan growth and riskiness of banks," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2929-2940, December.
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    13. Adams, Brian & Carow, Kenneth A. & Perry, Tod, 2009. "Earnings management and initial public offerings: The case of the depository industry," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2363-2372, December.
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    Cited by:

    1. repec:kap:jfsres:v:52:y:2017:i:3:d:10.1007_s10693-016-0255-0 is not listed on IDEAS
    2. Lakshmi Balasubramanyan & James B. Thomson & Saeed Zaman, 2013. "Are banks forward-looking in their loan loss provisioning? Evidence from the Senior Loan Officer Opinion Survey (SLOOS)," Working Paper 1313, Federal Reserve Bank of Cleveland.

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    Keywords

    Financial markets ; Financial institutions;

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