Cross-country determinants of bank income smoothing by managing loan-loss provisions

Fonseca, Ana Rosa; González, Francisco

doi:10.1016/j.jbankfin.2007.02.012

Cited by 358 publications

(337 citation statements)

References 28 publications

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“…Our use of year dummies and bank fixed effects is consistent with the cross-country studies of Fonseca & Gonzalez (2008) and Gebhardt & Novotny-Farkas (2011).…”

Section: Income Smoothing Through Llpsmentioning

confidence: 54%

“…Our controls include variables that do not qualify as normal determinants of LLPs but that are more likely connected to the discretionary part of LLPs, such as Tier 1 and Size. Given the incentives for opportunistic reporting that Tier 1 introduces, it can be considered one of the main determinants of DLLPs (see Ahmed et al 1999, Fonseca & Gonzalez 2008. Regarding Size, the same explanation holds.…”

Section: Income-increasing and Income-decreasing Dllpsmentioning

confidence: 91%

“…We further expect that provisions increase with NCOs because the two variables are mechanically related (Kanagaretnam et al 2004). Because our aim is to control for normal determinants of LLPs, we choose not to include control variables, such as bank size and Tier 1 ratio, that do not qualify as normal determinants of LLPs but that are more likely connected to the discretionary part of LLPs (Ahmed et al 1999, Fonseca & Gonzalez 2008. Table 2 provides further details about our variables.…”

Section: Income-increasing and Income-decreasing Dllpsmentioning

confidence: 99%

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Does Basel II affect the market valuation of discretionary loan loss provisions?

Hamadi

Heinen

Linder

et al. 2016

Journal of Banking & Finance

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We use a sample of banks from 24 European countries to investigate whether the adoption of the Basel II Capital Accord in 2008 affects the market valuation of discretionary loan loss provisions (DLLPs). Although Basel II lowers the incentives of internal ratingsbased (IRB) banks to recognize income-increasing DLLPs in an opportunistic manner, it has no such impact on the remaining banks, which adopt the Standardized methodology. We use this setup in a difference-in-difference (DiD) design, where Standardized banks act as a control group. Our evidence supports the three hypotheses that, for IRB relative to Standardized banks, Basel II is associated with (i) less income-increasing DLLPs and (ii) less income-smoothing via DLLPs, which enhances the informational content of DLLPs about future loan losses and leads to (iii) higher market valuation of DLLPs. Our findings are timely and have policy implications for future regulatory developments in the banking industry.

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“…Our use of year dummies and bank fixed effects is consistent with the cross-country studies of Fonseca & Gonzalez (2008) and Gebhardt & Novotny-Farkas (2011).…”

Section: Income Smoothing Through Llpsmentioning

confidence: 54%

Section: Income-increasing and Income-decreasing Dllpsmentioning

confidence: 91%

Section: Income-increasing and Income-decreasing Dllpsmentioning

confidence: 99%

See 1 more Smart Citation

Does Basel II affect the market valuation of discretionary loan loss provisions?

Hamadi

Heinen

Linder

et al. 2016

Journal of Banking & Finance

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“…Following previous research, the relationship between LLP and ΔNPL will be positive and statistically significant if, bank managers use some ration of LLP to cover predicted loan losses, (Fonseca &Gonzalez, 2008 andLepetit, 2008). Alternatively, the relationship between LLP and ΔNPL will be negative if, the bank managers do not set aside provisions to cover predicted loan losses, (Laeven & Majnoni, 2003).…”

Section: Independent Variablesmentioning

confidence: 82%

Loan Loss Provisions, Income Smooth, Signaling, Capital Management and Pro-Cyclicality. Empirical Evidence from Mozambique’s Commercial Banks

Siueia¹,

Wang²

2017

IJEF

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The aim of this study is to provide the first empirical evidence of income smoothing, capital management, signaling, and pro-cyclical behavior through loan loss provisions (LLP) for Mozambican commercial Banks, an example of the under-developed country. A second goal is to understand the bank lending behavior during the Mozambique's hidden public debt crisis. The sample consists of all commercial banks observed during 2010-2016. We provide strong evidence that Mozambican commercial banks are pro-cyclical through LLP and these banks engage in income smoothing activity. However, for capital management activity and signaling behavior, we provide insignificant evidence to support these hypotheses among Mozambican commercial banks via LLP. Also, the result indicates that Mozambique's hidden public debt crisis, the commercial banks put aside more provisions.

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“…That income smoothing does occur and to a significant degree, is demonstrated by a number of articles, representative of which are Fonseca and Gonzalez (2008); Kanagaretnam et al (2003) and Lim and Lustgarten (2002). Zohreh and Ghasab (2012) found that managers could not produce value by engaging in income smoothing.…”

Section: Earnings Qualitymentioning

confidence: 99%

Critical Elements of Foreign Currency Translation: A Worldwide Informational and Accounting Problem

Holt¹

2013

American Journal of Economics and Business Administration

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The purpose of this study is to describe and clarify the foreign currency translation problem and to suggest normative criteria by which various methodologies can be tested. The translation problem is presented as a set of four critical questions: (1) whether translation should be done, (2) what numbers to use to translate foreign currency accounts into the reporting currency, (3) what to do with the imbalance that results from translating different accounts with different numbers and (4) what, if anything, to do about changes in price levels. Several normative criteria are recommended for evaluating of various translation methodologies, some related specifically to earnings quality. It is further suggested that when empirical research is done to test various translation methodologies against normative criteria, (1) no translation at all and (2) price parity methodologies should also be tested.

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Cross-country determinants of bank income smoothing by managing loan-loss provisions

Cited by 358 publications

References 28 publications

Does Basel II affect the market valuation of discretionary loan loss provisions?

Does Basel II affect the market valuation of discretionary loan loss provisions?

Loan Loss Provisions, Income Smooth, Signaling, Capital Management and Pro-Cyclicality. Empirical Evidence from Mozambique’s Commercial Banks

Critical Elements of Foreign Currency Translation: A Worldwide Informational and Accounting Problem

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