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Central bank digital currency and bank earnings management using loan loss provisions

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  • Ozili, Peterson K

Abstract

This paper investigates the role of central bank digital currency (CBDC) in bank earnings management, and focus on how CBDC activity might influence banks to engage in accrual earnings management using loan loss provisions (LLPs) and the implications for earnings quality. I show that banks will use accruals, such as loan loss provisions, to manage earnings when CBDC-induced bank disintermediation leads to a reduction in bank deposits, a reduction in bank lending and a likely reduction in reported earnings. Bank managers will mitigate the reduction in reported earnings by lowering discretionary LLPs to increase reported earnings.

Suggested Citation

  • Ozili, Peterson K, 2023. "Central bank digital currency and bank earnings management using loan loss provisions," MPRA Paper 116412, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:116412
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    File URL: https://mpra.ub.uni-muenchen.de/116412/1/MPRA_paper_116412.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    banks; earnings management; central bank digital currency; loan loss provisions; CBDC; disintermediation; accruals; income smoothing; migration; earnings quality; income smoothing;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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