Does Greater Transparency Discipline the Loan Loss Provisioning of Privately Held Banks?

37 Pages Posted: 4 Aug 2020

See all articles by Jannis Bischof

Jannis Bischof

University of Mannheim - Accounting and Taxation

Daniel Foos

Deutsche Bundesbank

Jan Riepe

University of Tuebingen - Department of Banking

Date Written: 2020

Abstract

We investigate the relationship between the transparency of loan loss provision disclosures and the provisioning practices of privately held banks. We study a unique change in disclosure regulation under German banking law which introduces mandatory disclosures of loan loss provisions. Using proprietary data provided by the national supervisor, we are able to observe provisioning practices before and after disclosure becomes mandatory. Our findings suggest that bank managers use loan loss provisions to a lesser extent for income smoothing once they are required to disclose their accounting choice. At the same time, provisions become more informative about future loan losses. The change comes in the absence of capital market pressure and highlights the role of depositors and public pressure in the monitoring of bank managers. We exploit cross-sectional variation and show that the change is associated with differences in the local information environment and banks' funding structure.

Keywords: Loan Loss Provisions, Public Disclosure, Privately Held Banks, Earnings Smoothing, Market Discipline

JEL Classification: G21, G28, M41, M48

Suggested Citation

Bischof, Jannis and Foos, Daniel and Riepe, Jan, Does Greater Transparency Discipline the Loan Loss Provisioning of Privately Held Banks? (2020). Deutsche Bundesbank Discussion Paper No. 40/2020, Available at SSRN: https://ssrn.com/abstract=3669518

Jannis Bischof (Contact Author)

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Daniel Foos

Deutsche Bundesbank ( email )

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

Jan Riepe

University of Tuebingen - Department of Banking ( email )

Nauklerstr. 47
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

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