Bank Loan Loss Provisions: A Reexamination of Capital Management, Earnings Management

Discussion in 'Economics' started by ASusilovic, Mar 20, 2009.

  1. Abstract:

    This paper exploits the 1990 change in capital adequacy regulations to construct more powerful tests of capital and earnings management effects on bank loan loss provisions. We find strong support for the hypothesis that loan loss provisions are used for capital management. We do not find evidence of earnings management via loan loss provisions. We also document the reasons for the conflicting results on these effects observed in prior studies. Additionally, we find that loan loss provisions are negatively related to both future earnings changes and contemporaneous stock returns contrary to the signaling results documented in prior work.

    US bank regulator questions loan loss provision rule


    At issue is an accounting standard called an "incurred loss" model that a bank can use if a loss is probable and can be reasonably estimated.


    Under the "incurred loss" model, banks could use historical loss data to predict their future losses. But if data was lacking during good times, banks were prohibited from building their loan reserves, Dugan said.

    "Why did our loan loss reserving system produce such a low level of reserves at the beginning of this downturn?" Dugan said.

  2. Daal


    'First loan loss reserves does not count as part of Tier 1 capital under the new regulations', this must be why loans are going bad faster than banks are building reserves