Bank Earnings and Regulatory Capital Management Using Available for Sale Securities

53 Pages Posted: 12 Jun 2014 Last revised: 6 Apr 2017

Mary E. Barth

Stanford University - Graduate School of Business

Javier Gómez Biscarri

Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE)

Ron Kasznik

Stanford Graduate School of Business

Germán López-Espinosa

University of Navarra

Date Written: April 4, 2017

Abstract

Based on a large sample of publicly listed and non-listed US commercial banks from 1996 to 2011, we find robust evidence consistent with banks using realized available for sale (AFS) securities gains and losses to smooth earnings and increase low regulatory capital. We also find (i) banks with positive earnings smooth earnings, and banks with negative earnings generally take big baths; (ii) regulatory capital constrains big baths, (iii) banks with more negative earnings and more unrealized beginning-of-quarter losses (gains) take big baths (smooth earnings); and (iv) banks with low regulatory capital and more unrealized gains realize more gains. Also, banks with negative earnings take big baths (avoid or reduce the earnings loss), if their unrealized gains are insufficient (sufficient) to offset the negative earnings. Our inferences apply to listed and non-listed banks, which indicates the earnings management incentives do not derive solely from public capital markets. Our findings reveal the accounting for AFS securities gains and losses enables banks to manage regulatory capital and earnings in a variety of ways.

Keywords: Banks, earnings management, available for sale securities, realized gains and losses, regulatory capital

JEL Classification: M41, M48, G21

Suggested Citation

Barth, Mary E. and Gómez Biscarri, Javier and Kasznik, Ron and López-Espinosa, Germán, Bank Earnings and Regulatory Capital Management Using Available for Sale Securities (April 4, 2017). Available at SSRN: https://ssrn.com/abstract=2448482 or http://dx.doi.org/10.2139/ssrn.2448482

Mary E. Barth (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9040 (Phone)
650-725-0468 (Fax)

Javier Gómez Biscarri

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Ron Kasznik

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-725-9740 (Phone)
650-725-6152 (Fax)

Germán López-Espinosa

University of Navarra ( email )

Facultad de Ciencias Económicas y Empresariales
Edificio Amigos
Pamplona, Navarra 31080
Spain
+34 948425600 (Phone)
+34 948425626 (Fax)

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