Earnings and Capital Management in Alternative Loan Loss Provision Regulatory Regimes

33 Pages Posted: 27 Jul 2006

See all articles by Jesus Saurina Salas

Jesus Saurina Salas

Banco de España

Daniel Perez

Banco de España

Vicente Salas-Fumás

University of Zaragoza - Department of Business Administration and Organization

Multiple version iconThere are 2 versions of this paper

Date Written: June 26, 2006

Abstract

The paper sets an accounting and behavioral framework from which we derive a reduced form equation to test income smoothing and capital management practices through loan loss provisions (PLL) by Spanish banks. Spain offers a unique environment to perform those tests because there are very detailed rules to set aside loan loss provisions and they are not counted as regulatory capital. Using panel data econometric techniques, we find evidence of income smoothing through PLL but not of capital management. The paper draws some lessons for accounting rule setters and banking regulators regarding the current changes in the accounting framework (introduction of IFRS/IAS in Europe) as well as the new capital framework (Basel II). In particular, a very detailed set of rules to set aside loan loss provisions does not prevent managers from decreasing earnings volatility, similarly to what happens in a more principles oriented accounting framework.

Keywords: income smoothing, capital management, IFRS/IAS, Basel II

JEL Classification: G18, G21

Suggested Citation

Saurina Salas, Jesus and Perez, Daniel and Salas-Fumás, Vicente, Earnings and Capital Management in Alternative Loan Loss Provision Regulatory Regimes (June 26, 2006). Banco de Espana Research Paper No. WP-0614. Available at SSRN: https://ssrn.com/abstract=920331 or http://dx.doi.org/10.2139/ssrn.920331

Jesus Saurina Salas (Contact Author)

Banco de España ( email )

Madrid 28014
Spain

Daniel Perez

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

HOME PAGE: http://www.bde.es

Vicente Salas-Fumás

University of Zaragoza - Department of Business Administration and Organization ( email )

Dr. Cerrada 1
5005 Zaragoza
Spain
+34 976 761803 (Phone)

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