Determinants of bank income smoothing: Cross-country evidence from EEA banks during the COVID-19 pandemic crisis

Małgorzata Olszak, Christophe Godlewski and Gracjan Bachurewicz ()
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Gracjan Bachurewicz: Wydzial Zarzadzania, Uniwersytet Warszawski

Working Papers of LaRGE Research Center from Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg

Abstract: This study investigates income-smoothing through loan-loss provisions among European Economic Area banks, with a focus on the Covid-19 crisis. Results indicate a pandemic-induced rise in income-smoothing, particularly in countries receiving substantial liquidity support from fiscal schemes and the European Central Bank’s Pandemic Emergency Purchase Program. This trend is mitigated in nations with robust governance and financial openness. Market structure and financial development, while not affecting income-smoothing, influence loan-loss provision levels. Macroprudential vulnerabilities also play a role, as a stricter macroprudential oversight correlates with reduced earnings management via loan-loss provisions. Notably, banks in countries with heightened pre-crisis countercyclical buffers did not engage in income-smoothing during the pandemic, but a zero-buffer rate was associated with a higher degree of income-smoothing. The findings underscore the significance of macroprudential policies in curbing opportunistic financial reporting during economic downturns.

Keywords: loan-loss provisions; income-smoothing; Covid-19 crisis; liquidity support; governance; finance and macroprudential vulnerabilities (search for similar items in EconPapers)
JEL-codes: E44 E58 G21 G28 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ban and nep-cba
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