Are Banks Using Hidden Reserves to Beat Earnings Benchmarks? Evidence from Germany

Posted: 18 Jun 2012

See all articles by Sven Bornemann

Sven Bornemann

University of Muenster - Finance Center Muenster

Thomas K. Kick

Deutsche Bundesbank

Christoph Memmel

Deutsche Bundesbank

Andreas Pfingsten

University of Münster - Finance Center Münster

Multiple version iconThere are 2 versions of this paper

Date Written: 2012

Abstract

Section 340f of the German Commercial Code allows banks to provision against the special risks inherent to the banking business by building hidden reserves. Beyond risk provisioning, these reserves are implicitly accepted as an earnings management device. By analyzing financial statements of German banks for the period 1997–2009, we see these hidden reserves being used to (1) avoid a negative net income, (2) avoid a drop in net income compared to the previous year, (3) avoid a shortfall in net income compared to a peer group, and (4) reduce the variability of banks’ net income over time. Our analysis also shows that if bank managers are unable to reach the targets as set out in (1)–(3), they are more inclined to keep the hidden reserves for use in future periods.

Keywords: Earnings management, commercial banking

JEL Classification: G21

Suggested Citation

Bornemann, Sven and Kick, Thomas K. and Memmel, Christoph and Pfingsten, Andreas, Are Banks Using Hidden Reserves to Beat Earnings Benchmarks? Evidence from Germany (2012). Journal of Banking and Finance, Vol. 36, No. 8, 2012, Available at SSRN: https://ssrn.com/abstract=2085276

Sven Bornemann

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29948 (Phone)
+49 251 83 22882 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm

Thomas K. Kick (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Christoph Memmel

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Andreas Pfingsten

University of Münster - Finance Center Münster ( email )

Universitätsstr. 14-16
Muenster, D-48143
Germany

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