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

77 Pages Posted: 5 Oct 2023 Last revised: 11 Dec 2023

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

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Date Written: October 5, 2023

Abstract

Whether transparency helps or hurts the stability of the financial system is an unresolved question. Recent trends have seen a decline in disclosure requirements especially for small and privately held banks. 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 timelier and loan portfolio quality improves. The change comes in the absence of capital market pressure and highlights the role of depositors and public pressure in the monitoring and disciplining of bank managers. Overall, these findings support the view that bank transparency helps establish financial stability.

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

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? (October 5, 2023). TRR 266 Accounting for Transparency Working Paper Series No. 134, Available at SSRN: https://ssrn.com/abstract=4593329 or http://dx.doi.org/10.2139/ssrn.4593329

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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