Visible Reserves in Banks – Determinants of Initial Creation, Usage and Contribution to Bank Stability

38 Pages Posted: 26 Jul 2014

See all articles by Sven Bornemann

Sven Bornemann

University of Muenster - Finance Center Muenster

Susanne Homölle

University of Rostock - Faculty of Business Administration, Economics and Social Sciences

Carsten Hubensack

University of Muenster - Finance Center Muenster

Thomas K. Kick

Deutsche Bundesbank

Andreas Pfingsten

University of Münster - Finance Center Münster

Date Written: June/July 2014

Abstract

The opportunity of building up visible “Reserves for General Banking Risks” by the bank management represents a peculiarity in the German financial accounting framework for banks. We investigate German banks' motives for the creation and usage of these reserves and assess their role in financial stability. We find that banks primarily create and use GBR reserves to build up Tier 1 capital for regulatory capital management and earnings management purposes. Most importantly, however, we also reveal that banks using these reserves are less likely to experience a future distress or a bank default event. We therefore conclude that the existence of GBR reserves within the financial accounting framework represents both a convenient capital and earnings management tool for bank managers and a beneficial regulatory instrument to enhance bank stability.

Keywords: bank regulation, visible bank reserves, risk provisioning, capital management, earnings management, internal funding, bank stability

Suggested Citation

Bornemann, Sven and Homölle, Susanne and Hubensack, Carsten and Kick, Thomas K. and Pfingsten, Andreas, Visible Reserves in Banks – Determinants of Initial Creation, Usage and Contribution to Bank Stability (June/July 2014). Journal of Business Finance & Accounting, Vol. 41, Issue 5-6, pp. 507-544, 2014, Available at SSRN: https://ssrn.com/abstract=2472220 or http://dx.doi.org/10.1111/jbfa.12073

Sven Bornemann (Contact Author)

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

Susanne Homölle

University of Rostock - Faculty of Business Administration, Economics and Social Sciences ( email )

Ulmenstr. 69
Rostock, 18057
Germany
+49-381-498-4302 (Phone)
+49-381-498-4304 (Fax)

Carsten Hubensack

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+492518322879 (Phone)
+492518322882 (Fax)

HOME PAGE: http://kreditwesen.uni-muenster.de/

Thomas K. Kick

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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