Loan Loss Reserves, Accounting Constraints, and Bank Ownership Structure

41 Pages Posted: 18 Dec 2012

See all articles by Eliana Balla

Eliana Balla

Federal Reserve Banks - Federal Reserve Bank of Richmond

Morgan J. Rose

University of Maryland, Baltimore County; Office of the Comptroller of the Currency

Multiple version iconThere are 2 versions of this paper

Date Written: November 17, 2011

Abstract

This paper examines how the tightening of accounting constraints associated with the SunTrust bank decision in 1998 impacted the loan loss reserve policies of banks differently based on ownership structure. The SunTrust case, the result of an SEC inquiry over possible overstating of loan loss reserves, represented a strengthening of accounting priorities, which stress the importance of the reserve account for financial statement objectivity and comparability, relative to supervisory priorities, which emphasize the role of reserves for bank solvency through changing economic environments. The evidence presented indicates that publicly held banks, which fall directly under the SECs purview, reduced their loan loss reserve and provisions relative to privately held banks. Evidence also indicates that the positive relationship between bank earnings and provisions weakened, consistent with a reduction in either earnings management or early recognition of losses.

Keywords: loan loss provisioning, earnings management, income smoothing, ownership structure, financial institutions, banking regulation

JEL Classification: G21, G28, G32, E65

Suggested Citation

Balla, Eliana and Rose, Morgan J., Loan Loss Reserves, Accounting Constraints, and Bank Ownership Structure (November 17, 2011). FRB Richmond Working Paper No. 11-9, Available at SSRN: https://ssrn.com/abstract=2190609 or http://dx.doi.org/10.2139/ssrn.2190609

Eliana Balla (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Morgan J. Rose

University of Maryland, Baltimore County ( email )

1000 Hilltop Circle
Baltimore, MD 21250
United States
410-455-8485 (Phone)

Office of the Comptroller of the Currency

400 7th Street SW
Washington, DC 20219
United States

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