Did the regulatory changes of 1999 and 2001 affect income smoothing behavior of US banks?

Abdullah Mamun (), Md Didarul Alam () and George Tannous ()
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Abdullah Mamun: University of Saskatchewan
Md Didarul Alam: Ingram & Yeadon Accountants
George Tannous: University of Saskatchewan

Review of Quantitative Finance and Accounting, 2019, vol. 52, issue 4, No 4, 1041 pages

Abstract: Abstract This study examines the impact of the regulatory changes introduced by the Federal Financial Institutions Examination Council (FFIEC) in 1999 and by the Securities and Exchange Commission and FFIEC in 2001 on the income smoothing approaches and mechanisms employed by the United States (US) banking industry. We find that the relationship between previous quarter charge-offs and current quarter recoveries that was prevalent in the 1990’s to be insignificant for homogeneous loans but for heterogeneous loans the relationship became significant in the years following the regulatory changes. Recoveries are positively and significantly associated with the surprise net interest margin or return on assets which implies recoveries are primarily determined by the economic realities of the charged-off loans. The regulatory changes have strengthened the relationship between current quarter recoveries from heterogeneous loans and current quarter charge-offs but for homogeneous loans this relationship weakened insignificantly. The new regulations reduced the surprise gross loan charge-offs suggesting that the enforcement improved the accuracy of the provision as a predictor of next quarter’s gross loan charge-offs.

Keywords: Bank income smoothing; Regulatory changes; Charge-off; Recovery (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-018-0734-5

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