Determinants for Using Visible Reserves in German Banks: An Empirical Study

52 Pages Posted: 8 Jun 2016

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: 2009

Abstract

The German Commercial Code (HGB) allows banks to build visible reserves for general banking risks according to section 340g HGB. These GBR reserves may, in addition to their risk provisioning function, be used to enhance capital endowment, for internal financing, signaling or earnings management purposes. We analyze financial statements of German banks for the period from 1995 through 2007 to reveal specific patterns in the use of GBR reserves. Our empirical investigation is based on a large, unbalanced panel of German banks including 32,023 bank-year observations. We see an increase in the use of GBR reserves over time. Furthermore, we can say that GBR reserves are primarily used by large banks, banks with comparatively low regulatory capital endowment, as well as those with lower risks. Furthermore, GBR reserves are used by fairly profitable banks, those reporting according to international financial reporting standards in addition to HGB, and banks which are not thrifts or cooperative banks. Finally, we find that banks which make use of hidden reserves according to section 340f HGB also tend to hold GBR reserves. We explain our findings with regulatory factors and existing information asymmetries as well as banks' size and ownership structure.

Keywords: Bank regulation, informational asymmetries, risk provisioning, visible reserves, hidden reserves

JEL Classification: G21, G32, M41

Suggested Citation

Bornemann, Sven and Homölle, Susanne and Hubensack, Carsten and Kick, Thomas K. and Pfingsten, Andreas, Determinants for Using Visible Reserves in German Banks: An Empirical Study (2009). Bundesbank Series 2 Discussion Paper No. 2009,11, Available at SSRN: https://ssrn.com/abstract=2794034

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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