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We investigate how investors perceive the adoption of the expected-loss model (ELM) for impairment incorporated in IFRS 9. Using a sample of European listed banks covering the period of the standard-setting process of IFRS 9, we examine whether the market perceives the new regulation to increase shareholder wealth. First, we document a positive market reaction to the ELM adoption events. Second, we find that investors perceive that the potential benefits of ELM are more pronounced for larger banks, banks with lower profitability and higher systemic risk, and for those that received a public bailout and with more positively skewed returns. Overall, these results support a "monitoring" channel suggesting that ELM may lead to greater bank transparency and more effective market discipline, fundamental for improving financial stability. [ABSTRACT FROM AUTHOR]

This study explores the empirical link between income inequality and banks' Loan Loss Provisions (LLPs) through a sample of banking institutions from 132 countries, applying a panel regression methodology. The evidence reveals that higher LLPs have a positive impact on income inequality, and the findings remain valid across various model specifications and income inequality measures. The results also hold against various robustness tests, such as different bank sizes, developed vs. emerging countries, the impact of the 2008 global financial crisis, and the controlling for risk. The implications are relevant for stakeholders, including regulators that endeavor to protect banking systems against expected and unexpected losses via LLPs. Specifically, since credit decisions have substantial effects on income inequality, regulators should mitigate the accumulation of LLPs, allowing more funds to be available for other banking system activities and functions. [ABSTRACT FROM AUTHOR]

• Bank income smoothing is reduced by strong investor protection in Africa. • The smoothing of positive earnings is more aggressive in highly corrupt environments. • There is cross country variation in the use of loan loss provisions for income smoothing purposes. This study investigates bank income smoothing, focusing on the effect of corruption on income smoothing by African banks. I find that banks use loan loss provisions to smooth positive (non-negative) earnings particularly in the post-2008 crisis period and this behaviour is reduced by strong investor protection. Also, I find that banks in highly corrupt environments smooth their positive (non-negative) earnings as opposed to smoothing the entire profit distribution. Finally, cross-country variation in bank income smoothing is observed. The findings have implications. [ABSTRACT FROM AUTHOR]

Copyright of Accounting Auditing Control / Comptabilité Contrôle Audit (English Edition) is the property of Association Francophone de Comptabilite c/o Solle and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

There is a current controversy concerning the appropriate size of banks’ capital requirements, and the trade-off between the costs and benefits of implementing higher capital requirements. We quantify the size of capital buffers required to reduce system-wide losses using confidential regulatory data for Australian banks from 2002 to 2014 and annual public accounts from 1978 to 2014. We find that a moderate increase in bank capital buffers is sufficient to maintain financial system resilience, even after taking economic downturns into consideration. Furthermore, while banks benefit from paying a lower cost of debt when they have a higher capital buffer, lending volumes are lower indicating that credit supply may be hampered if bank capital levels are too high within a financial system. [ABSTRACT FROM AUTHOR]

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. [ABSTRACT FROM AUTHOR]

We study the effect of governments' fiscal support on banks' loan loss provisioning during the COVID-19 pandemic. In addition, we decompose fiscal support into direct support and liquidity support to examine the effect of different types of support measures on banks' loan loss provisioning. Direct support generally refers to cash transfers, tax reliefs, and tax deferrals, while liquidity support generally refers to government-backed loans and equity injections. We find that direct support reduced banks' loan portfolio risk whereas liquidity support did not. Moreover, we find the effect goes beyond a macroeconomic stabilization effect, suggesting that direct support directly contributed to mitigating banks' loan portfolio risk during the pandemic. Our results are robust to controlling for other policy interventions, alternative model specifications, and an instrumental variable approach. We further discuss the policy implications of our analysis. • We show that fiscal support reduced banks' loan loss provisions during the pandemic. • We then decompose fiscal support into direct support and liquidity support. • Based on this, we show that mainly direct support reduced loan loss provisions. • This has implications for the design of fiscal support measures during recessions. [ABSTRACT FROM AUTHOR]

From a sample of Islamic banks around the world from 1997 to 2012, this paper examines whether loan loss provisioning in Islamic banks is procyclical. Our empirical findings highlight that loan loss provisioning in Islamic banks remains procyclical, although the ‘expected’ loan loss model (E-LLM) has been implemented for Islamic banks in several countries. A closer investigation further documents that Islamic banks also use loan loss provisions for discretionary managerial actions, especially related to capital management in which loan loss reserves and provisions are inflated when bank capitalization declines. Eventually, this paper highlights that higher capitalization can mitigate the procyclicality of loan loss provisions in Islamic banks. In other words, loan loss provisioning becomes countercyclical for Islamic banks with higher capitalization. This paper therefore casts doubts on the adoption of the E-LLM for Islamic banks to promote countercyclical effects, because the E-LLM may be influenced by managerial discretion, including opportunistic capital management using loan loss provisions that may undermine the importance of maintaining bank capitalization. [ABSTRACT FROM AUTHOR]

In this study we examine two types of manipulation: earnings and capital management (or capital adequacy management) in banks, using an international sample of banks from four countries (USA, UK, Germany and France), which in couples belong in common financial systems (two common – law countries and two code – law countries). In specific, we examine the implications of two aspects of auditor reputation, auditor type and auditor industry specialization, for earnings management via the manipulation of the earnings benchmark. We prove that different aspects of auditor reputation per financial system restrict the motivation of managers for earnings manipulation. Furthermore, we examine the levels of the earnings and capital management in banks by separating our research period in the pre – Basle II regime and the post – Basle II regime. We prove that in the post – Basle II period the banks per financial system limit earnings and capital adequacy management. Moreover, we examine the effects of auditor reputation both in earnings and capital management by using the same model taking into account the financial crisis of 2008 with the results of this (expanded) research to be highly interesting for each financial system. [ABSTRACT FROM AUTHOR]

This study examines whether the material internal control weaknesses (ICW) of commercial banks affect loan loss reserves and provisions. Bank regulators have been keen to improve the internal control procedures of banks in order to obtain accurate estimates of loan loss exposures. GAO (1991, 1994) reports that loan-loss reserves are often determined based on historical loss rates even for large loans, rather than individual loan impairment assessments, and the reported loan loss reserves include substantial amounts of supplemental reserves that are not linked to the loan loss exposure. We expect and find that banks with material ICW have, on average, higher loan loss reserves and provisions in years of ICW than those without ICW. We also find that ICW banks with successful remedial actions no longer have higher levels of loan loss reserves or provisions in the next year, while banks that report material ICW in both the current and following year continue to have significantly higher amounts of loan loss reserves and provisions in the next year. [ABSTRACT FROM AUTHOR]

This paper examines the impact of loan loss provisions (LLPs) on return predictability during 1994–2017. We find that on average, LLPs are negatively associated with one year ahead stock returns. This effect is particularly significant during the global financial crisis but much weaker during the Basel II and III periods. Consistent with these findings, a long–short trading strategy based on LLPs generates positive abnormal returns during the Basel II and III periods but negative abnormal returns during the financial crisis. Cross-sectional tests show that this effect is more pronounced among banks with greater information asymmetry. Decomposition of LLPs suggests that these findings are driven mainly by nondiscretionary LLPs. Overall, our results suggest that the relationship between LLPs and future stock returns is not linear but contingent on bank regulations and macroeconomic conditions. [ABSTRACT FROM AUTHOR]

Abstract: This study investigates earnings management through managing specific accruals vs. structuring transactions in the banking industry. This paper explores the circumstances under which banks manipulate loan loss provisions vs. circumstances that lead banks to structure loan sales and securitizations for the purpose of achieving earnings benchmarks. Empirical results show that banks manage earnings through loan loss provisions, before resorting to structuring transactions, to avoid small earnings decreases and or just meet or beat analysts'' forecasts. The findings imply that structuring loan sales and securitizations is more likely to be used as a secondary instrument. In addition, I find that the earnings of banks with lower discretionary loan loss provisions and higher discretionary gains from loan sales and securitizations are priced more negatively, suggesting that investors impose incremental penalties on the joint use of loan loss provisions and gains from loan sales and securitization to meet or beat earnings benchmarks. [Copyright &y& Elsevier]

Copyright of International Economics (2110-7017) is the property of Elsevier B.V. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

This paper studies the effects of business cycles on the performance of commercial bank loan portfolios across major developing economies in the period 1996–2008. We measure loan performance via loan loss provisions (that is, recognized expenses related to expected losses in bank income statements). Our results indicate that while economic growth is the main driver of loan portfolio performance, interest rates have second-order effects. Furthermore, we find the relationship between loan loss provisions and economic growth to be highly non-linear only under extreme economic stress: GDP growth needs to decline by more than 6 percentage points (pp, in absolute terms) in order to generate an increase in loan loss provisions equivalent to median emerging market bank profits; while a decline of more than 10 pp in growth implies significant capital losses, of at least 20 percent, for the median emerging market bank. In addition, we find higher loan loss provisions are associated with private sector leverage, poor loan portfolio quality, and lack of banking system penetration and capitalization. [ABSTRACT FROM AUTHOR]

Abstract: This paper studies the effects of business cycles on the performance of commercial bank loan portfolios across major developing economies in the period 1996–2008. We measure loan performance via loan loss provisions (that is, recognized expenses related to expected losses in bank income statements). Our results indicate that while economic growth is the main driver of loan portfolio performance, interest rates have second-order effects. Furthermore, we find the relationship between loan loss provisions and economic growth to be highly non-linear only under extreme economic stress: GDP growth needs to decline by more than 6 percentage points (pp, in absolute terms) in order to generate an increase in loan loss provisions equivalent to median emerging market bank profits; while a decline of more than 10pp in growth implies significant capital losses, of at least 20 percent, for the median emerging market bank. In addition, we find higher loan loss provisions are associated with private sector leverage, poor loan portfolio quality, and lack of banking system penetration and capitalization. [Copyright &y& Elsevier]

• Directors with multiple directorships tend to delay the recognition of loan loss provisions. • A U-shaped relationship exists between directors with multiple directorships and loan loss provision. • Banks with moderately busy directors' delay loan loss provisions more than banks with directors with fewer directorships and time-poor over-boarded directors. • Moderately busy directors achieve profitability targets while maintaining their reputations and indicates their optimism about the loans' future. This paper examines whether directors with multiple directorships affect extent of banks' loan loss provisions in South Asia. Our results indicate that directors with multiple directorships tend to delay the recognition of loan loss provisions. Specifically, we find the existence of a U-shaped relationship between directors with multiple directorships and loan loss provisions, indicating that the delay is more pronounced in the case of moderately busy directors than in that of directors with fewer directorships and time-poor over-boarded directors. This helps directors achieve profitability targets while maintaining their reputations and indicates their optimism about the loans' future. Our results are robust in terms of accounting for endogeneity concerns, which are addressed using a two-stage least squares regression and entropy-balancing methodology as well as some alternative definitions of 'multiple directorships' used in the literature. [ABSTRACT FROM AUTHOR]

This paper investigates the impact of bank executive pay limits on discretionary loan loss provisions (DLLPs) in the context of a large emerging economy, such as that of China. We find that a bank executive pay limit primarily aimed at temporarily suspending stock option incentive plans leads to a significant rise in income-decreasing DLLPs, whereas a pay limit implemented to restrict the total emoluments leads to a significant decline in income-increasing DLLPs. Moreover, the degree of the impact of pay limits on bank DLLPs varies with CEOs' personal characteristics and bank executive perquisites. [ABSTRACT FROM AUTHOR]

We employ dynamic panel data models to examine the performance (profitability and asset quality) of a large sample of Canadian banks from 1996Q1 to 2018Q2. Profits, measured as return on assets (ROA), depend on bank factors (capital adequacy, loan loss provisions (LLP) and non-interest income), the slope of the yield curve, and several oil price measures. Our findings suggest that the persistence of profits is estimated to be around 0.40 and the direct impact of oil prices tends to be positive on profits. When oil interacts with non-interest income, there is a strong positive relationship. This can be interpreted as oil price increases leading to more banking transactions (derivatives, fees) and then higher profits. Our evidence also suggests that positive oil price changes increase the asset quality of Canadian banks by reducing the ratio of LLP. [ABSTRACT FROM AUTHOR]