Are Banks Using Hidden Reserves to Beat Earnings Benchmarks? Evidence from Germany

68 Pages Posted: 8 Jun 2016

See all articles by Sven Bornemann

Sven Bornemann

University of Muenster - Finance Center Muenster

Thomas K. Kick

Deutsche Bundesbank

Christoph Memmel

Deutsche Bundesbank

Andreas Pfingsten

University of Münster - Finance Center Münster

Multiple version iconThere are 2 versions of this paper

Date Written: 2010

Abstract

Section 340f of the German Commercial Code allows banks to provision against the special risks inherent to the banking business by building hidden reserves. Beyond risk provisioning, these reserves are implicitly accepted as an earnings management device. By analyzing financial statements of German banks for the period 1995 through 2009, we see these hidden reserves being used to (1) avoid a negative net income, (2) avoid a drop in net income compared to the previous year, (3) avoid a shortfall in net income compared to a peer group, and (4) reduce the variability of banks' net income over time. We (5) find a diminished relevance of avoiding a drop in net income as well as a shortfall relative to the peer group during the financial crisis. Finally, we are (6) unable to confirm any differences in the relevance of hidden reserves for earnings management between listed and non-listed banks.

Keywords: Earnings management, Income smoothing, Hidden reserves, Prospect theory, Financial institution

JEL Classification: C23, G21, M41

Suggested Citation

Bornemann, Sven and Kick, Thomas K. and Memmel, Christoph and Pfingsten, Andreas, Are Banks Using Hidden Reserves to Beat Earnings Benchmarks? Evidence from Germany (2010). Bundesbank Series 2 Discussion Paper No. 2010,13, Available at SSRN: https://ssrn.com/abstract=2794052

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

Thomas K. Kick

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Christoph Memmel

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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