Income Smoothing Practices of US Banks Around the 2008 Financial Crisis

Abstract

The financial crisis of 2008 had a profound effect on the US banking industry, causing financial distress and the failure of a large number of banks. In this paper, we investigate whether or not banking institutions smoothed their reported earnings upward through the utilization of loan loss provisions during the financially challenging times of the Great Recession. Using a large dataset of commercial banks and thrifts, our empirical results provide support for the income smoothing hypothesis that banking institutions underestimated their provision for loan losses in order to offset their declining earnings in the period after the financial crisis.

Keywords: Financial Crisis, Income Smoothing, Provision for Loan Losses, Commercial Banks, Thrifts

JEL Classification: G21, M41