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

Abstract

Purpose This paper aims to analyse 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. Design/methodology/approach The paper used conceptual discourse analysis to explain the role of CBDC in bank earnings management. Findings Banks will use accruals, such as LLPs, 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. Originality/value The recent emergence of CBDC in the digital currency universe has led to increased research interest on the role of CBDC in corporations and society. This study contributes to the literature by focusing on banks, and examining the effect of CBDC on bank earnings management.

Bitcoin’s bubbly behaviors: does it resemble other financial bubbles of the past?

“…Governments and central banks could regulate some aspects of this market by considering the creation of their own centralized digital currencies, known as CBDCs, as described by Alonso ( 2023 et al (2023). Although some studies show that the general sentiment of the population towards these new central digital currencies is positive, there is also some resistance to their use in some sectors of the population, as described by Ozili and Nañez Alonso (2024).…”

Central bank digital currencies: a comprehensive systematic literature review on worldwide research emergence and methods used

“…(2023b) implemented a structural equation model with partial least squares-path modeling (PLS-PM) and questionnaire data. Ozili (2023b) undertook a literature review augmented by regression analysis on Nigerian banking sector data and Panwar and Agarwal (2023) applied a CBDC project index and a random forest model. Kim and Kwon (2023) utilized an overlapping-generations model, while Fujiki (2023b) conducted a survey with data from the Cash Alternative Survey.…”

Impact of Central Bank Digital Currency (CBDC) Activity on Bank Loan Loss Provisions

“…However, once the rate is above the threshold, bank failure risk will increase, thereby undermining banking stability (Jun and Yeo, 2021). Ozili (2023b) investigated the role of central bank digital currency (CBDC) in bank earnings management, focusing on how CBDC activity might influence banks to engage in accrual earnings management using loan loss provisions (LLPs) and the implications for earnings quality. The author showed that banks will use 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 reduction in reported earnings.…”

“…The author showed that banks will use 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 reduction in reported earnings. Bank managers will mitigate the reduction in reported earnings by lowering discretionary LLPs to increase reported earnings (Ozili, 2023b). Sarkisyan (2022) showed that CBDC will not necessarily crowd out bank deposits in economies with significant demand for currency, and non-interest-bearing CBDC will lead to an inflow of deposits caused by cash substitution.…”

“…Customers can choose to convert their existing bank deposits to CBDC units, and the converted deposits may be held in a wallet or token; just as physical money is held in one's pocket or in a physical wallet or purse (Ozili, 2022a). A CBDC held in a wallet or token may not be available to commercial banks for financial intermediation purposes (Ozili, 2023b). Similarly, if bank deposits are migrated to CBDC deposits, the migrated deposits may not be available to commercial banks for financial intermediation.…”