Earnings and Capital Management in Alternative Loan Loss Provision Regulatory Regimes

Posted: 22 Jan 2008

See all articles by Daniel Perez

Daniel Perez

Banco de España

Jesus Saurina Salas

Banco de España

Vicente Salas-Fumás

University of Zaragoza - Department of Business Administration and Organization

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Abstract

Accounting scholars and policy makers have expressed concern about the quality of accounting data. Because earnings and capital management practices alter the information content of accounting statements, we ask whether a transparent smoothing device such as the statistical provision - a counter-cyclical bank loan loss provision that increases in economic upturns and decreases in downturns, and is reported separately by banks - may contribute to improving quality of accounting data. We find that Spanish banks use loan loss provisions to smooth earnings but we find no evidence that they practice capital management. We also find that credit risk variables weigh more and net operating income weighs less as determinants of generic and specific loan loss provisions after the introduction of the statistical provision than they did before this provision was introduced. Therefore, the quality of banks' accounting statements improves upon use of the new statistical provision.

Keywords: income smoothing, capital management, IFRS, Basel II

JEL Classification: G18, G21, M41, M43, M47

Suggested Citation

Perez, Daniel and Saurina Salas, Jesus and Salas-Fumás, Vicente, Earnings and Capital Management in Alternative Loan Loss Provision Regulatory Regimes. European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1086319

Daniel Perez

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

HOME PAGE: http://www.bde.es

Jesus Saurina Salas (Contact Author)

Banco de España ( email )

Madrid 28014
Spain

Vicente Salas-Fumás

University of Zaragoza - Department of Business Administration and Organization ( email )

Dr. Cerrada 1
5005 Zaragoza
Spain
+34 976 761803 (Phone)

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