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Year 2015, , 302 - 315, 29.06.2015
https://doi.org/10.17261/Pressacademia.2015211621

Abstract

References

  • • Ahmed, A.S., Takeda, C. and Thomas, S. (1999). Bank loan loss provisions: A reexamination of capital management, earnings management and signaling effects. Journal of Accounting and Economics 28: 1-25.
  • • Beaver, W and Engel, E. (1996). Discretionary behavior with respect to allowance for loan losses and the behavior of security prices. Journal of Accounting and Economics, 22: 177-206
  • • Bhat, V.N (1996) Banks and income smoothing: an empirical analysis, Applied Financial Economics, 6:6: 505-510
  • • Bikker, J. A., & Metzemakers, P. A. (2005). Bank provisioning behaviour and procyclicality. Journal of International Financial Markets, Institutions and Money, 15(2): 141-157.
  • • Cavallo, M., and Majnoni, G. (2002). Do banks provision for bad loans in good times? Empirical Evidence and PolicyIimplications. Springer: 319-342.
  • • Curcio, D., and Hasan, I. (2013). Earnings and capital management and signaling: the use of loan-loss provisions by European banks. The European Journal of Finance, (ahead-of-print), 1-25.
  • • El Sood, H., A. (2012). Loan loss provisions and income smoothing in US banks pre and post the financial crisis. International Review of Financial Analysis, 25:64-72.
  • Management and Procyclicality: Does IFRS Matter? Empirical Evidence from
  • Nigeria, Mediterranean Journal of Social Sciences, 6 (2): 224-232. APPENDIX 1
  • Table 6: Full Sample Correlation Variables LLR 1.000 LOTA LOAN INGL GDPR NPL
  • 0.729*** 1.000 0.000 LOTA -0.053 0.149 1.000 0.174 LOAN -0.054 0.142 0.000 0.000 INGL
  • -0.251*** -0.276*** -0.227*** -0.284*** 1.000 0.000 0.000 0.000 0.000 GDPR 0.076** -0.083** 0.222*** 0.379*** -0.311*** 1.000 0.039 0.023 0.000 0.000 0.000

CREDIT SMOOTHING AND DETERMINANTS OF LOAN LOSS RESERVES EVIDENCE FROM EUROPE, US, ASIA AND AFRICA

Year 2015, , 302 - 315, 29.06.2015
https://doi.org/10.17261/Pressacademia.2015211621

Abstract

This study provides a link between accounting, managerial discretion and monetary policy. Monetary authorities encourage banking institutions to supply credit to the economy. Increased bank supply of credit is a good thing but too much of a good can be a bad thing. This paper investigates under what circumstances excessive loan supply ceases to be a good thing and how bank managers react to this. After examining 82 bank samples, I find that (i) bank underestimate the level of reserves to boost credit supply in line with expectations of monetary authorities, particularly, in Asia and UK (ii) consistent with the credit smoothing hypothesis, US and Chinese banks smooth credit supply to minimize unintended stock market signaling; (iii) managerial priority during a recession is to smooth credit over time rather than to boost credit supply; (iv) non-performing loans, bank portfolio risk and loan portfolio size are significant determinants of the level of loan loss reserves; and (v) credit risk, proxy by loan growth, do not have a significant impact on loan loss reserves but tend to have some significant effect during a recession, particularly, when change in loans is negative. The implications of these findings are two-fold: (i) bank managers use their discretion over reserves to influence bank credit supply; (ii) bank supply of credit is not solely driven by loan demand but by a combination of several factors, particularly, capital market concerns, the need to avoid scrutiny from monetary authorities, and country-specific factors.

References

  • • Ahmed, A.S., Takeda, C. and Thomas, S. (1999). Bank loan loss provisions: A reexamination of capital management, earnings management and signaling effects. Journal of Accounting and Economics 28: 1-25.
  • • Beaver, W and Engel, E. (1996). Discretionary behavior with respect to allowance for loan losses and the behavior of security prices. Journal of Accounting and Economics, 22: 177-206
  • • Bhat, V.N (1996) Banks and income smoothing: an empirical analysis, Applied Financial Economics, 6:6: 505-510
  • • Bikker, J. A., & Metzemakers, P. A. (2005). Bank provisioning behaviour and procyclicality. Journal of International Financial Markets, Institutions and Money, 15(2): 141-157.
  • • Cavallo, M., and Majnoni, G. (2002). Do banks provision for bad loans in good times? Empirical Evidence and PolicyIimplications. Springer: 319-342.
  • • Curcio, D., and Hasan, I. (2013). Earnings and capital management and signaling: the use of loan-loss provisions by European banks. The European Journal of Finance, (ahead-of-print), 1-25.
  • • El Sood, H., A. (2012). Loan loss provisions and income smoothing in US banks pre and post the financial crisis. International Review of Financial Analysis, 25:64-72.
  • Management and Procyclicality: Does IFRS Matter? Empirical Evidence from
  • Nigeria, Mediterranean Journal of Social Sciences, 6 (2): 224-232. APPENDIX 1
  • Table 6: Full Sample Correlation Variables LLR 1.000 LOTA LOAN INGL GDPR NPL
  • 0.729*** 1.000 0.000 LOTA -0.053 0.149 1.000 0.174 LOAN -0.054 0.142 0.000 0.000 INGL
  • -0.251*** -0.276*** -0.227*** -0.284*** 1.000 0.000 0.000 0.000 0.000 GDPR 0.076** -0.083** 0.222*** 0.379*** -0.311*** 1.000 0.039 0.023 0.000 0.000 0.000
There are 12 citations in total.

Details

Primary Language English
Journal Section Articles
Authors

Peterson Ozili This is me

Publication Date June 29, 2015
Published in Issue Year 2015

Cite

APA Ozili, P. (2015). CREDIT SMOOTHING AND DETERMINANTS OF LOAN LOSS RESERVES EVIDENCE FROM EUROPE, US, ASIA AND AFRICA. Journal of Business Economics and Finance, 4(2), 302-315. https://doi.org/10.17261/Pressacademia.2015211621

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