The Impact of SFAS 133 on Income Smoothing by Banks Through Loan Loss Provisions

Posted: 21 Jul 2012

See all articles by Emre Kilic

Emre Kilic

University of Houston - C. T. Bauer College of Business

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Tharindra Ranasinghe

American University

Shiva Sivaramakrishnan

Rice University

Date Written: 2012

Abstract

We examine the impact of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, on the reporting behavior of commercial banks and the informativeness of their financial statements. We argue that, because mandatory recognition of hedge ineffectiveness under SFAS 133 reduced banks’ ability to smooth income through derivatives, banks that are more affected by SFAS 133 rely more on loan loss provisions to smooth income. We find evidence consistent with this argument. We also find that the increased reliance on loan loss provisions for smoothing income has impaired the informativeness of loan loss provisions for future loan defaults and bank stock returns.

Keywords: SFAS 133, Income smoothing, Hedging, Derivatives, Loan loss provisions

JEL Classification: G14, G21, M41, M44, M45

Suggested Citation

Kilic, Emre and Lobo, Gerald J. and Ranasinghe, Tharindra and Sivaramakrishnan, Shiva, The Impact of SFAS 133 on Income Smoothing by Banks Through Loan Loss Provisions (2012). Accounting Review, Forthcoming, Mays Business School Research Paper No. 2113381, Available at SSRN: https://ssrn.com/abstract=2113381

Emre Kilic (Contact Author)

University of Houston - C. T. Bauer College of Business ( email )

Department of Accountancy & Taxation
4800 Calhoun Road
Houston, TX 77204
United States
(713) 743-4795 (Phone)
(713) 743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/Directory/profile.asp?search=Emre%20Kilic

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Tharindra Ranasinghe

American University ( email )

United States

Shiva Sivaramakrishnan

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

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