Loan loss reserves, accounting constraints, and bank ownership structure

Eliana Balla and Morgan Rose

No 11-09, Working Paper from Federal Reserve Bank of Richmond

Abstract: This paper examines how the tightening of accounting constraints associated with the SunTrust bank decision in 1998 impacted the loan loss reserve policies of banks differently based on ownership structure. The SunTrust case, the result of an SEC inquiry over possible overstating of loan loss reserves, represented a strengthening of accounting priorities, which stress the importance of the reserve account for financial statement objectivity and comparability, relative to supervisory priorities, which emphasize the role of reserves for bank solvency through changing economic environments. The evidence presented indicates that publicly held banks, which fall directly under the SECs purview, reduced their loan loss reserve and provisions relative to privately held banks. Evidence also indicates that the positive relationship between bank earnings and provisions weakened, consistent with a reduction in either earnings management or early recognition of losses.

Keywords: Financial markets; Financial institutions (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-acc and nep-ban
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