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The paper explores the impact of bank diversification on earnings opacity. We aim at offering a comprehensive analysis by focusing on four dimensions of diversification: income, assets, funding, and loan portfolios. Using data from Vietnam over the period 2007–2022, we document consistent and robust evidence that increased diversification across all forms mitigates earnings management via discretionary loan loss provisions. To shed further light on this pattern, we examine how the banking complexity and opacity nexus varies with multiple measures of bank competition. We find that more intense competition in the banking system likely accentuates the impact of diversification on bank earnings manipulations. Our findings provide important implications related to bank business models and banking market structures in the era of financial deregulation and innovation.

Abstract In this study, we investigate the tail dependency between bank stocks in China and 35 common risk factors. We measure univariate and multivariate conditional tail risk probabilities. The evidence indicates that tail events from risk factors in the banking, security trading, real estate, and energy industries have the largest effects on the realization of extreme returns from Chinese bank stocks. The univariate conditional tail risk is considerably higher than the unconditional tail risk. The impact of multiple tail events from several risk factors occurring simultaneously is much stronger than tail events from one single risk factor. In general, there is a stronger cross‐market tail linkage between emerging market risk factors and bank stocks in China when compared with developed market risk factors. However, the cross‐market tail linkage between developed market risk factors and bank stocks in China rose sharply during the 2008 financial crisis.

Purpose: The main objective of this study was to examine influence of credit risk stress testing on operational performance of commercial Kenya. The theoretical framework was based on credit risk theory. Methodology/Approach: The study used all commercial banks which are 42 it total. The adopted mixed research comprising of causal and longitudinal research designs. The study used secondary data from operational statements of banks. Descriptive applied involved skewness, kurtosis, mean and standard deviation. Multiple regression analysis was also applied. Data was presented using tables. Findings: The results revealed that expected loan loss lead to performance of commercial Banks as shown by a positive and significant coefficient of in the regression model in a fixed effect model. Implications: The study suggested that operational institutions implement a stringent policy that escalates the loss in the event of default, thereby restricting loan approvals to clients who can guarantee they will repay the loan in full.

This paper empirically investigates whether trade openness (TO) in Brazil, Russia, India, China and South Africa (BRICS) countries affects how banks might employ loan loss provisions (LLPs) to smooth out their earnings and how adopting the International Financial Reporting Standards (IFRS) can mitigate it. The analysis includes 78 commercial banks from five BRICS nations and spans 2014 through 2020. To test these hypotheses, the authors utilized a fixed-effect and two-step system panel generalized methods of moments (GMM) estimator. TO positively affects income smoothing (earnings management) across BRICS commercial banks. The effect is clearer in banks that make financial reports under the IFRS. Path analysis reveals that the effect of TO is driven by nonperforming loans (NPLs). Additionally, the IFRS restricts earnings management in the BRICS banking sector when a better institutional environment is present. The authors found that accounting rules (IFRS) and enforcement (better institutional settings) interact to enhance earnings’ quality. The relationship between TO and bank earnings management practices is important for understanding the complex interplay between trade and finance and ensuring financial stability, investor confidence and regulatory compliance. This study recommends better regulations and governance mechanisms for financial reports in emerging nations like BRICS. Additionally, macro-prudential regulators and banking supervisors should work closely to ensure transparent TO decisions with improved discipline, institutional quality and regulatory support to enhance bank stability. The study finds evidence of bank income smoothing in the BRICS and introduces TO as a determinant. It also identifies the evolving role of IFRS in the presence of higher institutional quality and TO, thereby expanding the financial reporting literature.

Purpose – This study examines the impact of competition and concentration on bank income smoothing in Central and Eastern European (CEE) countries. Design/methodology/approach – The two-step system GMM method was used to analyse the impact of competition and concentration on bank income smoothing in 17 CEEs from 2004 to 2015. Findings – Loan loss provisions (LLPs) are negatively related to bank competition and concentration. The authors find no evidence for income smoothing using LLPs in a high-competition or high-concentration environment. Research limitations/implications – A limitation of the study is that the analysis was restricted to commercial banks. The authors did not examine investment banks or microfinance banks in this study. Also, not having access to databases does not allow them to include recent years in the study. Practical implications – CEE commercial banks will likely keep fewer provisions or engage in under-provisioning when they face intense competition, and this can expose them to credit risk, which may threaten their stability. Originality/value – This study is the first to investigate the effect of concentration and competition on income smoothing among CEE banks.

The episodic financial crises in Indonesia highlighted the importance of strengthening banks’ capital to maintain financial stability. To achieve such an objective, the Financial Service Authority (OJK) issued OJK Regulation Number 12/2020, which mandates banks to meet capital standards to preserve a sound financial system. However, given the short timeframe, banks need to conduct seasoned equity offerings (SEOs) to satisfy the regulation, where they could potentially perform earnings management before the SEOs to raise optimal capital. We used secondary data derived from www.idx.co.id from Q1-2019 to Q4-2021. We use the Wilcoxon signed-rank test to examine whether there are significant abnormal LLPs between pre- (2019-2020) and post-regulation (2020-2021), suggesting that bank managers conduct earnings management before SEOs through their discretion over LLP items. We also use a correlation test to investigate the association between earnings management and LLPs. Our study finds that bank managers engage in earnings management before SEOs to meet the capital adequacy regulation, given the short timeframe from the regulator. We also find a strong correlation between earnings management and LLPs. The study results suggest that bank managers engage in earnings management, regardless of whether it is income-increasing or income-decreasing, before the SEO period in response to the capital adequacy regulation through their use of discretion over LLP items.

Credit risk is a significant factor affecting the financial stability of banks. Keeping the credit risk under control is essential to maintain a bank’s cash flow. This paper examines the various profitability, microeconomic and macroeconomic indicators that affect a bank’s credit risk. The study uses the dataset of 31 banks from 2012 to 2021 and employs a panel data modelling approach to account for any variations in risk-taking behavior. The results revealed a statistically significant negative relationship between return on equity and credit risk when nonperforming loans proxy credit risk. This finding was consistent across fixed effect, random effect, and pooled OLS methods, at 1 percent significance (P value < 0.00), indicating that the extent of credit risk decreases as profitability increases. It was further found that bank age and ownership type positively affect a bank’s credit risk, while factors such as bank size and operational efficiency negatively affect credit risk when nonperforming loans proxy credit risk. Further, macroeconomic variables showed that gross domestic product is positively associated with credit risk, while inflation negatively affects credit risk. Overall, the findings of this paper demonstrated that credit risk is affected by both micro and macroeconomic factors. The paper also addresses significant policy implications as it helps various stakeholders to examine the determinants of credit risk, make credit decisions, and ultimately lower their credit risk.

The objective of the current paper is to study the influence of the selected business and institutional determinants on the annual effective tax rates in banks in Serbia. Panel data regression models are applied on 113 observations, covering the period from 2017 to 2021, where the accounting and current effective tax rates are used as a measure of the actual tax burden. The results show that the effective tax rate in banks in Serbia is significantly below the statutory level. Furthermore, for each data set, the coefficients of changes in the effective tax rate are calculated, and the most adequate model is selected using the Hausman and Breusch-Pagan tests. In the first model, the biggest change in the effective tax rates is caused by change in leverage, merger and acquisition processes and the bank size. The presence of loan loss provisions in the model completely highlights the impact of profitability and leverage. Finally, in the last model, banks with a profit before tax can manage effective tax rates and tax burdens by regulating capitalization levels. The results of this study are of interest for economy creators and for business managers in banks, helping them in effective tax planning and managing the results.

Abstract This study investigates the need for credit supervision as conducted by on-site banking supervisors. It builds on a real bank on-site credit examination to compare the performance of a hypothetical self-supervision approach, in which banks themselves assess their loan portfolios without external intervention, with the on-site banking supervision approach of the Central Bank of Brazil. The experiment develops two machine learning classification models: the first model is based on good and bad ratings informed by banks, and the second model is based on past on-site credit portfolio examinations conducted by banking supervision. The findings show that the overall performance of the on-site supervision approach is consistently higher than the performance of the self-supervision approach, justifying the need for on-site credit portfolio examination as conducted by the Central Bank.

The article highlights the use of macroprudential instruments by the Bank of Russia that regulate the population Lending of the Russian banking sector. The purpose of the work is to study the theoretical background and practical results of using indicators of the total cost of credit and the debt load of the population to ensure stability of the banking sector. The authors used methods of qualitative and quantitative analysis of scientific publications, regulatory sources, retrospective statistics. The study showed that initially, the regulator introduces new macroprudential instruments as recommended, and subsequently transfers them to mandatory. The regulatory mechanism is based on the ratio dependence of the bank capital adequacy on the actual values of the total loan cost and debt load of the borrower - individual. The mortgage debt to collateral value ratio supports the housing mortgage lending regulation process. The authors concluded that the banking sector’s reaction to the introduction of the total credit cost indicator is more prominent than the introduction of the debt burden indicator. When the Bank of Russia obliged to take into account the full cost of the loan when measuring capital adequacy, banks were not able to increase capital; they reduced high-risk lending. The practice of macroprudential regulation of credit risks in the banking sector is complemented by the introduction of credit holidays for borrowers - individuals, who are struggling because of the pandemic. The obtained theoretical and practical results can be used in the development of the financial stability regulation practice in Russia, at the micro-level - when designing and changing credit policy.

This paper aims to provide an overview of the literature on Loan loss provisions in the Banking industry. This research was conducted by reviewing some literature. LLP is a solution for banks to deal with risks that will be faced by banks or as a prudent banking principle. We have reviewed and mapped the literature in several sections, developments in the Basel Regulations, mapping LLP literature based on the research area, and LLP and hypothesis mapping. The main fact that we reveal is that most banks use LLP regulations for various purposes. This paper relies on the literature and highlights information as well as important issues related to LLP in the research field, this study highlights several important issues related to the banking industry in various countries. This study observed the role of LLP during the application of Basel III regulation which tended to provide flexibility to bank managers in determining provision reserves. We have reviewed the specific LLP literature in one country and cross-country research. This study identifies gaps and provides direction that can be used as a research contribution in the future.

An extensive literature examines managers’ incentives to smooth reported earnings using accruals in order to reduce price fluctuation of stocks in markets. Banks have additional incentives to engage in earnings management for a number of reasons, including tighter regulatory environment. They also have the ability to manage earnings using loan loss provisions (LLP). This paper examines earnings management using accruals – in particular, LLP - as the main accrual item in financial reporting of banks in the Iranian banking industry from 2005 to 2016. From previous studies, we expect that for banks with good (poor) current performance and expected poor (good) future performance, managers will save income for (borrow income from) the future by reducing (increasing) current income through LLP, especially discretionary LLP (DLLP). We also examine the effect of external financing, availability of other methods of earnings management like increasing (decreasing) non-operating income and capital requirements and also the relation of DLLP with risk. Our results indicate that bank managers do save earnings through DLLP in good times and borrow earnings using DLLP in bad times. We also find that bank risk is negatively associated with discretionary accruals.

Financial theorists have always focused on the ability of companies to manage earnings through the use of accounting methods for accruals. Evidence from some empirical research shows that earnings management is possible through the use of financial leverage and capital management and generally managing capital structure. The earnings management by banks is also implemented through monitoring loan-loss provision and net charge-off loans. This study investigates the relationship between "financial leverage and liquidity" and "earnings and capital management" of commercial banks listed in Tehran Stock Exchange (TSE) during the years 1385 to 1393. Data have been extracted from financial statements and their accompanying notes of some selected banks and Excel has been used to classify the data. Data analysis is also done using EViews software. The results from hypothesis testing show that there is a significant relationship between the liquidity ratios and financial leverage, earnings management and capital management in commercial banks.

This paper has been prepared to describe the regulatory measures regarding Loan classification and provisioning of South East Europe countries like Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Macedonia, Montenegro, Serbia, and Slovenia. A proper loan classification and provisioning system ensures credibility of the financial system that in turn restores trust and confidence in the mind of depositors. Determining what constitutes an adequate level of provisions to absorb credit losses is often subject of debate between banks and supervisors, as changes in provisioning estimate an immediate impact in bank earnings and, eventually, regulatory capital. A comparative analysis in this study between South East Europe (SEE) countries shows that countries have the regulatory measures which correspond with international standards. However, the criteria for classifying and provisioning loan portfolios depend on the prudential policies of the central banks. In the area of NPL definition, we find that almost all of the countries in the region have some type of asset classification system in place covering all types of borrowers. Non performing exposures in the region are generally defined three criteria: 90 days past due status, borrower bankruptcy, and the significant financial difficulty of the borrower. Countries with the highest rate of non‑performing loans (2005–2015) are Serbia, Montenegro, Albania, while the countries with the highest percentage of coverage with provisions are: Kosovo, Macedonia and Serbia.

The analysis of financial reporting for banks is of great interest for risk assessment and for understanding the potential for an increase in market value. Following the quantitative decomposition of the size of bank reserves on bad debts, the article concludes that there is the existence of a “subjective component” that acts as a qualitative signal for market investors. The paper analyses information on the significance for market investors of a number of indicators of financial reporting of 989 commercial public banks associated with credit risk. The paper focuses on the consideration of three financial statement items: non-performing loans, loan charge-offs, and loan loss provisions.The study provides an analysis of statistical data on the Russian market and the results of the empirical research on the global bank market with sub-samples on the developed and emerging markets, and the Eastern European and CIS banks. The analysis scale is from 2011 to 2015, in quarterly observations. It is shown that the share of non-performing loans, loan loss provisions and loan charge-offs can be informative for market investors not only in the risk assessment of a bank, but also in the diagnosis of management behavior, but also of expectations on the valuation of a public bank (mar-ket capitalization). The emphasis in this paper is placed on loan loss provisions, as this item is highly exposed to manip-ulations from bank managers, according to previously conducted research. In this study, it was attempted to empirically distinguish the “objective” and ‘subjective” components of loan loss provisions in financial reporting based on a large sample of banks in the global market. The influence of a “subjective” element on the reservation of the market value of a public bank was quantitatively evaluated. In fact, the reasons for the detection of a positive influence in the overstate-ment of established reserves on the market capitalization of a bank are revealed, despite a decrease of its current profit measure. Positive correlation can be explained by the impact of the signal effects from the bank management towards the market investors regarding the future sustainability of a bank.

We review the recent academic and policy literature on bank loan loss provisioning. Among other things, we observe that there exist some interaction between LLPs and existing prudential, accounting, institutional, cultural, religious, tax and fiscal frameworks which differ across countries; and we find that managerial discretion in provisioning is strongly linked to income smoothing, capital management, signalling, tax management and other objectives. We also address several issues including the ethical dimensions of income smoothing, factors influencing income smoothing, methodological issues in LLP modelling and the dynamic loan loss provisioning experiment; which opens up several avenues for further research such as: finding a balance between sufficient LLPs which regulators want versus transparent LLPs which standard setters want; the sensitivity of abnormal LLPs to changes in equity; the persistence of abnormal LLPs following CEO exit; country-specific interventions that induce LLP procyclicality in emerging countries; the impact of Basel III on banks' provisioning discretion; LLP behaviour among systemic and non-systemic financial institutions; etc. We conclude that regulators need to pay attention to how much discretion lending institutions should have in determining reported provision estimates, and this has been a long standing issue.

We examine the effects of the revised Basel II rules on bank managers’ discretionary behavior, specifically income smoothing and loan loss provisioning. As the revised rules exert greater regulatory pressure on corporate than retail banking, we predict corporate bank managers to reduce risk-taking activities or increase income smoothing. Analysis of segmental reports reveals greater (less) income smoothing in the corporate banking segments of low-capital (high-capital) banks during the Basel II period, with their managers recognizing loan loss provisions in a less timely fashion. We find no such effects for retail banking. Although we document an initially negative market reaction to the regulatory announcements, that reaction weakens over time. Overall, the study highlights the unintended consequences of the banking rule changes.

Loan loss provisions (LLP) and its related costs are factors having reducing effect on the profit and assets of banks. Iranian banks estimate their LLP each year according to the instructions provided by Central Bank of Islamic Republic of Iran. In this study, the main questions are: 1-whether LLP estimation is acceptable or not considering the financial and risk situation of banks, 2- if the estimated LLP is significantly different from the optimal value, how much it should be, and 3- which factors are affecting on this difference. In this regard, by adopting stochastic frontier model and using 19-bank financial data from 2007 to 2013 time period we examine the efficiency of Iranian banks’ LLP estimates. The results show that banks’ inefficiency scores in estimating LLP are different in various years. Iranzamin Bank with inefficiency score of 0.00054 was the most efficient bank and Bank Mellat with inefficiency score of 0.042 has been considered as the least efficient bank in estimating LLP in 2011.

The paper investigates whether there is a significance difference between the practices of discretionary loan/finance loss provisions between Islamic and conventional banks. Same time, the paper tests whether the efficiency may influence the behaviour of discretionary loans/finance loss provisions, taken into consideration other micro and macro variables. The study utilizes panel data runs over 1996–2011 with unbalanced observations for 16 banks, of which 4 Islamic banks. In order to achieve research objectives, the two-stage approach is adopted to examine the factors that may influence the behaviour of discretionary loan/finance loss provisions with specific emphasize on the efficiency. Furthermore, efficiency scores are estimated using Data Envelopment Windows Analysis. The findings of the research show that Islamic banks employ the discretionary loans/finance loss provisions to manage their earnings. However, the magnitude of discretion of accruals is significantly lower than conventional banks with exception for foreign banks which have reported lower discretionary loans/finance loss provisions than Islamic banks. Moreover, the analysis showed that efficiency affects the overall discretionary loans/finance loss provision positively, although this impact is shaped differently for Islamic and conventional banks.