Income smoothing in European banks: The contrasting effects of monitoring mechanisms

Fabio, Costanza Di; Ramassa, Paola; Quagli, Alberto

doi:10.1016/j.intaccaudtax.2021.100385

Cited by 15 publications

(22 citation statements)

References 97 publications

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“…(2021) and Skała (2021) find a significant and negative link between capital and LLP in European banks. In contrast, Di Fabio et al. (2021) show a positive and insignificant effect of capital on LLP in Europe.…”

Section: Methods and Datamentioning

confidence: 75%

“…A positive regression coefficient on GDPG would imply the countercyclicality of LLP. Previous research (Bikker and Metzemakers, 2005;Fonseca and Gonz alez, 2008;Balla and Rose, 2015;Soedarmono et al, 2017;Olszak IJOEM 18,12 et al, 2017Meril€ ainen, 2019;Danisman et al, 2021;Hegde and Kozlowski, 2021;Tran and Houston, 2021;Di Fabio et al, 2021;Pandey et al, 2022) shows that LLPs are procyclical and, therefore, are negatively associated with GDPG. The stronger the negative coefficient of GDPG, the more procyclicality there is.…”

Section: Procyclicalitymentioning

confidence: 95%

“…The literature identifies at least three aspects of discretionary provisioning practices (Kim et al, 2019). Bank managers can use discretionary LLPs to manage earnings and smooth income (Fonseca and Gonz alez, 2008;Di Fabio et al, 2021;Danisman et al, 2021;Skała, 2020;Choudhary and Jain, 2021), to manage capital (Ahmed et al, 1999;Soedarmono et al, 2017;Danisman et al, 2021;Jutasompakorn et al, 2021) and to incorporate forward-looking and timely judgments on expected credit losses (Gebhardt and Novotny-Farkas, 2011;Bushman and Williams, 2012;Kim et al, 2019;Jutasompakorn et al, 2021). The timely loss recognition (timeliness of LLPs) became an important issue during the global financial crisis because of the evidence that the incurred-loss method is associated with procyclicality of lending (Beatty and Liao, 2011;Bouvatier et al, 2012;Bouvatier and Lepetit, 2013;Wheeler, 2019).…”

Section: Introductionmentioning

confidence: 99%

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Procyclicality of loan-loss provisions and competitive environment – a global perspective

Olszak

Kowalska

2022

IJOEM

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PurposeDespite the extensive debate on the impact of bank competition on risk-taking, there is no evidence of its role in procyclicality of loan-loss provisions (LLPs). The purpose of this study is to find out what is the role of competition in the procyclicality of LLPs.Design/methodology/approachUsing over 70,000 bank-level observations in 103 countries in 2004–2015 and the LLPs model, this study interacts competition with business cycle to check what is the effect of competition on procyclicality of LLPs.FindingsThis study finds that intense competition is associated with more procyclicality of LLPs. Increased procyclicality of LLPs in a more competitive environment is binding for high-income countries. The opposite effect is shown for low-income countries.Research limitations/implicationsFuture research can be extended by testing the role of additional factors – such as regulations, supervision or institutional protection of shareholders' rights, in the association between procyclicality and competition.Practical implicationsThe main message of this paper is that the competitive environment changes the procyclicality of LLPs. The results are important from the point of view of the COVID-19 pandemic because government interventions during lockdowns will affect competition in the banking industry and in other industries of the economy.Originality/valueThis paper contributes to the extant research in three dimensions. First, it shows that competition is an important factor behind procyclicality of LLPs. Second, it adds to the research on the links between competition and financial stability. Third, it shows that the link between competition and procyclicality of LLPs depends on the economic development of the country in which the banks are located.

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Section: Methods and Datamentioning

confidence: 75%

Section: Procyclicalitymentioning

confidence: 95%

Section: Introductionmentioning

confidence: 99%

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Procyclicality of loan-loss provisions and competitive environment – a global perspective

Olszak

Kowalska

2022

IJOEM

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“…Kilic et al, 2013;Kanagaretnam et al, 2015;Cohen et al, 2014;Ozili, 2019;Di Fabio et al, 2021;Danisman et al, 2021;Ozili, 2022a). Consequently, the motivation for bank managers to manage their earnings is more persistent in corrupt institutional environments (Ozili, 2019), in highly regulated banking environments (Di Fabio et al, 2021), in less religious environments (Kanagaretnam et al, 2015), during financial crises (Cohen et al, 2014), during periods of high economic policy uncertainty, (Danisman et al, 2021), during periods of changes in accounting disclosure rules (Kilic et al, 2013), and during period of Fintech competition (Ozili, 2022a). Another external factor that can influence bank managers to manage bank earnings is the introduction of a central bank digital currency.…”

Section: A Theory Of Earnings Management Banks and Cbdcmentioning

confidence: 99%

“…In the case of banks, several studies show that external events motivate bank managers to engage in earnings management especially external events that have a direct impact on bank earnings (Kilic et al , 2013; Kanagaretnam et al , 2015; Cohen et al , 2014; Ozili, 2019; Di Fabio et al , 2021; Danisman et al , 2021; Ozili, 2022a). Consequently, the motivation for bank managers to manage their earnings is more persistent in corrupt institutional environments (Ozili, 2019), in highly regulated banking environments (Di Fabio et al , 2021), in less religious environments (Kanagaretnam et al , 2015), during financial crises (Cohen et al , 2014), during periods of high economic policy uncertainty, (Danisman et al , 2021), during periods of changes in accounting disclosure rules (Kilic et al , 2013) and during period of Fintech competition (Ozili, 2022a). Another external factor that can influence bank managers to manage bank earnings is the introduction of a CBDC.…”

Section: Literature Review and Theorymentioning

confidence: 99%

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

Ozili¹

2023

DPRG

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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.

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Introduction

Fabio

2021

SpringerBriefs in Accounting

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Income smoothing in European banks: The contrasting effects of monitoring mechanisms

Cited by 15 publications

References 97 publications

Procyclicality of loan-loss provisions and competitive environment – a global perspective

Procyclicality of loan-loss provisions and competitive environment – a global perspective

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

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