The cyclicality of loan loss provisions under three different accounting models: the United Kingdom, Spain, and Brazil

Abstract

A controversy involving loan loss provisions in banks concerns their relationship with the business cycle. While international accounting standards for recognizing provisions (incurred loss model) would presumably be pro-cyclical, accentuating the e ects of the current economic cycle, an alternative model, the expected loss model, has countercyclical characteristics, acting as a bu er against economic imbalances caused by expansionary or contractionary phases in the economy. In Brazil, a mixed accounting model exists, whose behavior is not known to be pro-cyclical or countercyclical. e aim of this research is to analyze the behavior of these accounting models in relation to the business cycle, using an econometric model consisting of nancial and macroeconomic variables. e study allowed us to identify the impact of credit risk behavior, earnings management, capital management, Gross Domestic Product (GDP) behavior, and the behavior of the unemployment rate on provisions in countries that use di erent accounting models. Data from commercial banks in the United Kingdom (incurred loss), in Spain (expected loss), and in Brazil (mixed model) were used, covering the period from 2001 to 2012. Despite the accounting models of the three countries being formed by very di erent rules regarding possible e ects on the business cycles, the results revealed a pro-cyclical behavior of provisions in each country, indicating that when GDP grows, provisions tend to fall and vice versa.e results also revealed other factors in uencing the behavior of loan loss provisions, such as earning management.

Gerenciamento de Resultados em Bancos Mediante a Divulgação do Lucro Ajustado por Itens Extraordinários

“…Tendo em vista que o objetivo das demonstrações financeiras é fornecer informações úteis para facilitar a alocação eficiente de recursos e as decisões das partes interessadas, os gerentes devem ter discricionariedade e julgamento para transmitir informações sobre o desempenho das empresas quando houver assimetria (Cohen & Zarowin, 2007). Porém, essa discricionariedade pode ser utilizada para maximizar o valor oportunisticamente, ou seja, os gestores podem utilizar-se dos incentivos para transmitir informação em benefício próprio, escolhendo métodos e estimativas contábeis que não refletem adequadamente as condições econômicas subjacentes, abrindo espaço para o gerenciamento de resultados (Araújo, Lustosa, & Paulo, 2018;Watts & Zimmerman, 1986). Schipper (1989) define gerenciamento de resultados como uma intervenção proposital no processo de elaboração das demonstrações financeiras externas, com intenção de obter algum benefício particular.…”