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Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association 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.)

In the wake of the financial crisis, policymakers expressed the concern that the incurred loss model delays loan loss recognition to economic stress periods and thereby exacerbates banks' lending contraction during these periods. Addressing this concern, the FASB issued Accounting Standards Update 2016-13, which requires large public banks to accrue for loan losses using the current expected credit loss (CECL) approach starting in January 2020. We hypothesize and find that banks that adopted CECL prior to the COVID-19 pandemic increased loan loss provisions and reduced loan growth during the accompanying recession more than other banks. The lending contraction is stronger for adopting banks with low regulatory capital and low loan impairment and is primarily driven by commercial loans. Lastly, we find that counties in which CECL-adopting banks have higher market share experience larger increases in unemployment rates during the recession and slower subsequent recoveries. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: E32; G21; G28; M41; M48. [ABSTRACT FROM AUTHOR]

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.

The Current Expected Credit Loss (CECL) Financial Accounting Standards Board (FASB) standard that goes into effect for major banks in 2020 contains a serious conceptual error. Using the contractual rate rather than the hurdle rate (the competitive rate on a loan for which there is no expected loss) as the rate to discount expected cash collections gives rise to accounting losses where no economic losses exist. This can have a profound effect on required capital and hence lending, especially in economically depressed episodes. [ABSTRACT FROM AUTHOR]

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.

We examine the relation between disaster risk and banks' loan loss provisions (LLP). We propose a disaster risk measure based on the natural disasters declared as major disasters by the Federal Emergency Management Agency over a 15-year span. We theoretically support and empirically validate our measure using three different approaches, including the UN Sendai Framework for disaster risk reduction, which relates disaster risk to natural hazard exposure, vulnerability and capacity, and hazard characteristics. Using more than 445,000 bank-quarter observations, we document that banks located in U.S. counties with higher disaster risk recognize larger LLP after controlling for other bank-level factors related to LLP. We employ several techniques to ensure the robustness of our findings, including difference-in-differences estimation and matched samples. In additional analysis, we explore the characteristics that better enable banks to recognize disaster risk in their LLP, and investigate the consequences of managing disaster risk through LLP. Our results are important, especially because of the increasing concern about disaster risk and because they inform the growing debate on the economic consequences of disaster risk and the ability of the banking system to proactively manage the resulting credit risk through LLP. [ABSTRACT FROM AUTHOR]

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. [ABSTRACT FROM AUTHOR]

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.

Through their procyclical behavior, loan loss provisions have been determined as one of the factors that contribute to financial instability during a crisis. IFRS 9 was introduced in 2018 with an expected credit loss model replacing the incurred loss model of IAS 39 to mitigate the effect in the future. Our study aims to analyze loan loss provisions of major banks in the Eurozone to determine for the first time if the implementation of IFRS 9, as intended by regulators, has a dampening effect on procyclicality, especially during the stressed situation under COVID‐19. We analyze 51 banks from 12 countries of the European Monetary Union using 2856 firm‐year observations. While no robust evidence of less procyclicality can be found after the implementation of IFRS 9 until the pandemic, we find evidence that loan loss provisions moved countercyclical during 2020, indicating an alleviating effect at the beginning of the exogenous shock. [ABSTRACT FROM AUTHOR]

This study investigates whether banking sector support for the realization of the SDGs affects bank loan loss provisions (LLPs). Using country-level data for 28 countries from 2011 to 2018 and using the panel fixed effect regression estimation method, it was found that banking sector support for achieving SDG7 and SDG10 leads to a significant decrease in bank loan loss provisions. Banks that support the realization of SDG6, and operate in countries that have strong institutions, experience a significant decrease in LLPs while banks that support the realization of SDG7, and operate in countries that have strong institutions, experience a significant increase in LLPs. The regional results are mixed. In the Asian region, banking sector support for achieving SDG13 decreases bank LLPs while banking sector support for achieving SDG8 and SDG10 increases bank LLPs. In the European region, banking sector support for achieving SDG3 decreases bank LLPs while banking sector support for achieving SDG4 and SDG6 increase bank LLPs. In the African region, banking sector support for achieving SDG6 increases bank LLPs. [ABSTRACT FROM AUTHOR]

We explore how expansionary monetary policy (EMP) influences bank loan loss provisioning. We find that banks' discretionary loan loss provisions (DLLPs) increase during periods of EMP. This effect is stronger for banks with greater risk-taking, a larger proportion of influential stakeholders, lower ex-ante transparency of loan loss provisions, and more stringent bank regulation, which is consistent with external stakeholders requiring more conservative and timelier loan loss provisioning. We also find that both the timeliness and the validity of banks' loan loss provisions (LLPs) increase during EMP periods. Our results are robust to the use of instrumental variable estimation and exogenous variations in monetary policy. Lastly, we show that conservative (i.e., higher DLLPs) and timely loan loss provisioning discipline banks from excessive risk-taking during periods of EMP. [ABSTRACT FROM AUTHOR]

This study documents a higher incidence of SEC Comment Letters among financial institutions characterized by abnormal levels of loan loss provisions (LLPs). In particular, results show that this effect is stronger for banks overestimating LLPs, suggesting an asymmetric attitude of the SEC Research Division toward overestimations compared with LLPs underestimations, especially in the pre-financial crisis period. Finally, the study demonstrates that after receiving a Comment Letter by the SEC, financial institutions change the way they account for LLPs by basing their computation more on historical data, thereby reducing the level of discretion embedded in their calculation. [ABSTRACT FROM AUTHOR]

We model the evolution of stylised bank loan portfolios to assess the impact of IFRS 9 and US GAAP expected loss model (ECL) on the cyclicality of loan write-off losses, loan loss provisions (LLPs) and capital ratios of banks, relative to the incurred loss model of IAS 39. We focus on the interaction between the changes in LLPs charges (the flow channel) and stocks (the stock channel) under ECL. Our results show that, when GDP growth doesn't demonstrate high volatility, ECL model smooths the impact of credit losses on profits and capital resources, reducing the pro-cyclicality of capital and leverage ratios, especially under US GAAP. However, when GDP growth is highly volatile, the large differences in lifetime probabilities of defaults (PDs) between booms and busts cause sharp increases in LLPs in deep downturns, as seen for US banks during the COVID-19 crisis. Volatile GDP growth makes capital and leverage ratios more pro-cyclical, with sharper falls in both ratios in deep downturns under US GAAP, compared to IAS 39. IFRS 9 ECL demonstrates less sensitivity to lifetime PDs fluctuations due to the existence of loan stages, and hence can reduce the pro-cyclicality of capital and leverage ratios, even when GDP is highly volatile. [ABSTRACT FROM AUTHOR]

We investigate whether banks use loan loss provisions to smooth income and whether this behaviour is influenced by foreign bank presence, ownership and institutional quality differences across African countries. We examine 370 banks from 21 African countries from 2002 to 2021. We find evidence that African banks use LLPs to smooth their income when they are more profitable during economic boom or recession. Income smoothing is persistent (i) among banks with a widely dispersed ownership, (ii) among banks with strong government ownership and (iii) among banks with weak government ownership. Income smoothing is also persistent in African countries that have greater corruption control, better regulatory quality and political stability. In contrast, moderate concentrated ownership reduces bank income smoothing. Bank income smoothing is also reduced in African countries that have strong rule of law, high government effectiveness, strong foreign bank presence and strong voice and accountability institutions. The implication is that effective corporate governance and institutional quality can constrain the extent of income smoothing by African banks. [ABSTRACT FROM AUTHOR]

We investigate whether, and to what extent, banks exploit their discretion over loan loss provisions to achieve their management purposes during the pandemic. Using a sample of US banks during the current COVID-19 outbreak, we find that banks are more eager to use discretionary loan loss provisions in response to the worsening pandemic situation. We find in particular that banks use discretionary loan loss provisions to manage regulatory capital, smooth income and signal private information to outsiders. Overall, this paper enriches the literature on bank discretionary behaviour during the difficult time, especially during the current COVID-19 pandemic, and therefore, it has important implications for banking supervisor and bank stakeholders. [ABSTRACT FROM AUTHOR]

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.

This study investigates the impact that market discipline mechanisms have on European Union (EU) banks' accounting policy decisions. We investigate the association between the level of loan loss provisions (LLPs) with earnings before provisions and taxes when depositors appear to withdraw their funds and demand higher deposit rates. We examine whether market discipline motivates banks to adjust earnings through accounting accruals. Empirical findings suggest that the demand for higher deposit rates limits management's accounting discretion. By contrast, withdrawals appear to encourage managers to use income smoothing via LLPs. The observed associations appear to be conditioned by banks' systemic importance and capital adequacy levels. [ABSTRACT FROM AUTHOR]

This paper investigates whether former auditors on the audit committee constrain earnings management through loan loss provisions. Based on an analysis of the annual reports of 82 African listed banks over the period 2011–2016, findings show that the presence of former auditors on an audit committee is associated with lower earnings management. This result suggests that audit committee members with auditing expertise and background contribute to effective monitoring of management's accounting practices. Furthermore, results reveal that the reducing effect on earnings management of former auditors is strongest for directors who are unaffiliated with the bank's current external auditor. [ABSTRACT FROM AUTHOR]

Auditors tend to be more conservative in their audits when they face greater litigation risk. However, it is unclear whether this conservatism is always desirable or whether it can be excessive. To evaluate the usefulness of greater auditor conservatism, we examine whether auditor conservatism improves audit quality and imposes real operating consequences for clients. We examine auditor behavior in a sample of auditors' client banks, when one of the auditor's other client banks fails (as deemed by the FDIC). We find that auditors that experience a bank failure within their portfolio become more conservative for surviving clients. However, we find that the larger loan loss provisions at surviving clients are no more timely, are less accurate, and reverse in subsequent periods. This finding suggests that auditors' initial portfolio-wide response to a specific client failure may be overly conservative. We also document that surviving client banks face real consequences in terms of constraints on their lending because of the auditor's excessive conservatism. Overall, we conclude that, in some situations, auditors may overreact, leading to excessive conservatism, which in turn has adverse consequences for clients. [ABSTRACT FROM AUTHOR]

Copyright of Muhasebe ve Vergi Uygulamalari Dergisi (MUVU) / Journal of Accounting & Taxation Studies (JATS) is the property of Ankara Serbest Muhasebeci Mali Musavirler Odasi 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.)

Environmental, social, and governance (ESG) performance has attracted debates of regulatory bodies and the academic community. Previous studies highlighted the relationship between corporate social responsibility (CSR) disclosure index and earnings management (EM) for non-financial firms. In this paper, we examine the relationship between the ESG performance and EM practices for a sample of US commercial banks over the period 2010–2019. We use two proxies for earnings management: abnormal loan loss provisions (ALLP) and EM to meet the threshold of reporting small positive profit or avoiding losses (SPOS). Consistent with the transparent financial reporting hypothesis, we find that banks reporting higher ESG performance are less likely engaged in income-increasing practice through ALLP. However, no evidence supports that ESG score mitigates EM through loss avoidance. Furthermore, we disaggregate the ESG score into its main three components: environmental, social, and governance. Our findings show that the governance pillar effectively mitigates EM practice under its two proxies. Specifically, the social pillar also seems to be an efficient constraint of banks' EM through income-increasing abnormal loan loss provisions and loss avoidance activity. However, no supporting evidence of a mitigating role for the environmental pillar is provided. Taken together, our results show that, except the environmental pillar, ESG performance score acts as an efficient mitigating tool for EM practices for US banks. Our findings provide a better understanding of banks' earnings management practices. Our findings are helpful for managers when undertaking long-term investment strategies in ESG reporting practices, regulators when issuing new standards, and banks' stakeholders when assessing both the financial and non-financial performance of such entities. [ABSTRACT FROM AUTHOR]

Copyright of Economic Horizons / Ekonomski Horizonti is the property of Economic Horizons 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.)

Motivated by diverging results from the literature, we investigate whether investments in information technology (IT) help banks to assess their loan portfolio. More specifically, we focus on the consequences of accumulated expenses for data processing on banks' ability to estimate their loan loss accruals. We further test for differences when the banks' borrowers get hit by the economic trouble from the COVID-19 pandemic. Using a sample of US commercial banks before and during the COVID-19 pandemic, we find more precise estimates of loan loss accruals during these troublesome times in banks that accumulated higher data processing expenses. Surprisingly, we do not find significant differences in the precision of loan loss accruals by banks' IT investments during normal times. Our findings contribute to consolidate previously diverging results by showing that IT investments help banks following a structural break, such as the COVID-19 pandemic. [ABSTRACT FROM AUTHOR]

The paper investigates the impact of loan loss provisions (LLPs) on bank-specific effective tax rates (ETRs) using data of 2943 banks from European Union during 2007-2014.As control variables we used size, equity, fixed assets and return on assets (ROA), while the specific country-year tax reforms were captured using Devereux-Griffith effective tax rates. The results prove robust to different model estimators and sample selections, which suggests that LLPs act systematically towards the reduction of the bank entities' corporate tax burden. When distinguishing between two banking business models, respectively shareholders-value (commercial banks) and stakeholders-value banks (savings and cooperative banks), empirical findings indicate that provisions negatively affects the former (commercial banks) specific ETRs, whereas for the latter (savings and cooperative banks), no statistical significant effect was detected. From policy perspective, in the context of the switch from the incurred-loss model to the expected-loss model with respect to LLPs (IFRS 9), this may signal additional tax bill reduction for bank entities, if decision makers fail to react promptly. Finally, looking at types of banks investigated, the results show that among all three categories of banks, commercial banks manage to avoid the increase of tax bill driven by some bank-specific determinants (i.e. ROA), while maximizing the tax savings driven by others (i.e. capital intensity), thus suggesting more tax planning oriented behaviour as compared to savings and cooperative banks. [ABSTRACT FROM AUTHOR]

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]