Loan loss provisioning and income smoothing in US banks pre and post the financial crisis

Heba Abou El Sood

International Review of Financial Analysis, 2012, vol. 25, issue C, 64-72

Abstract: Prior research shows that banks have strong incentives to use loan loss provisions to smooth income. Using a sample of 878 US bank holding companies over the period 2001–2009, I find strong evidence of income smoothing behavior. Additionally, bank holding companies accelerate loan loss provisions to smooth income when (1) banks hit the regulatory minimum target, (2) are in non-recessionary periods, and (3) are more profitable. I also find that bank internally set regulatory capital ratios are relatively more significant than regulatory‐set ratios to trigger income smoothing behaviour using loan loss provisions. Comparing the pre-crisis boom of 2002–2006 with the crisis period of 2007–2009, I find that banks use loan loss provisions more extensively during the crisis period to smooth income upward. Collectively, the results of this paper are relevant to current concerns of accounting standard setters and bank regulators on the current model of loan loss provisioning.

Keywords: Loan loss provisions; Income smoothing; Financial crisis; Bank holding companies (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 M41 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (59)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521912000609
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:25:y:2012:i:c:p:64-72

DOI: 10.1016/j.irfa.2012.06.007

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().