The Effect of Covid-19 on Loan Loss Provisions and Earnings Management of European Banks

The Effect of Covid-19 on Loan Loss Provisions and Earnings Management of European Banks
Author: Merjona Lamaj
Publisher: Springer Nature
Total Pages: 69
Release: 2023-01-12
Genre: Business & Economics
ISBN: 3658400609

This book examines the effect of Covid-19 on loan loss provisions (LLPs) and earnings management of European banks. Specifically, the author analyzes how the high flexibility offered by prudential authorities and standard setters in the context of Covid-19 affects banks’ use of discretion when accounting for loan loss provisions. She finds that during Covid-19 banks use discretionary LLPs to a greater extent than before Covid-19. This trend is more evident for banks located in countries that have implemented strong containment measures as a response to the Covid-19 pandemic. Moreover, while banks tend to overstate LLPs at the beginning of the pandemic, they do, on average, understate them during 2021. Finally, examining the direction of earnings management the author finds that during Covid-19 banks use upward earnings management, whereas before Covid-19 they engage in downward earnings management.

Banks' Income Smoothing Via Loan Loss Provisions

Banks' Income Smoothing Via Loan Loss Provisions
Author: Costanza Di Fabio
Publisher:
Total Pages:
Release: 2018
Genre:
ISBN:

This paper explores the impact of institutional factors on earnings management by investigating whether and to what extent the features of the national supervisory system affect banks' income smoothing through loan loss provisions (LLP). To address this issue, we consider the supervisory authority characteristics (strictness and effectiveness) and the role of market and external auditors based on the idea that they provide banks with different incentives to smooth earnings. Focusing on the European context, we find that income smoothing is higher in strict regimes, in line with the penalty hypothesis. However, under strict supervisors, evidence shows that private monitoring and the supervisory effectiveness in enforcing regulation reduce smoothing. By contrast, an active auditors' involvement in supervisory activities increases income smoothing, suggesting a considerable relevance of auditors' reputational concerns. Our findings show that supervisory power can produce an undesirable impact on accounting transparency when not combined with other monitoring levers.

COVID-19: How Will European Banks Fare?

COVID-19: How Will European Banks Fare?
Author: Mr.Shekhar Aiyar
Publisher: International Monetary Fund
Total Pages: 114
Release: 2021-03-26
Genre: Business & Economics
ISBN: 1513572776

This paper evaluates the impact of the crisis on European banks’ capital under a range of macroeconomic scenarios, using granular data on the size and riskiness of sectoral exposures. The analysis incorporates the important role of pandemic-related policy support, including not only regulatory relief for banks, but also policies to support businesses and households, which act to shield the financial sector from the real economic shock.

Global Financial Stability Report, October 2020

Global Financial Stability Report, October 2020
Author: International Monetary Fund. Monetary and Capital Markets Department
Publisher: INTERNATIONAL MONETARY FUND
Total Pages: 118
Release: 2020-10-23
Genre: Business & Economics
ISBN: 9781513554228

Near-term global financial stability risks have been contained as an unprecedented policy response to the coronavirus (COVID-19) pandemic has helped avert a financial meltdown and maintain the flow of credit to the economy. For the first time, many emerging market central banks have launched asset purchase programs to support the smooth functioning of financial markets and the overall economy. But the outlook remains highly uncertain, and vulnerabilities are rising, representing potential headwinds to recovery. The report presents an assessment of the real-financial disconnect, as well as forward-looking analysis of nonfinancial firms, banks, and emerging market capital flows. After the outbreak, firms’ cash flows were adversely affected as economic activity declined sharply. More vulnerable firms—those with weaker solvency and liquidity positions and smaller size—experienced greater financial stress than their peers in the early stages of the crisis. As the crisis unfolds, corporate liquidity pressures may morph into insolvencies, especially if the recovery is delayed. Small and medium-sized enterprises (SMEs) are more vulnerable than large firms with access to capital markets. Although the global banking system is well capitalized, some banking systems may experience capital shortfalls in an adverse scenario, even with the currently deployed policy measures. The report also assesses the pandemic’s impact on firms’ environmental performance to gauge the extent to which the crisis may result in a reversal of the gains posted in recent years.

Procyclicality of Loan Loss Provisions - The Case of Poland

Procyclicality of Loan Loss Provisions - The Case of Poland
Author: Małgorzata Olszak
Publisher:
Total Pages: 13
Release: 2014
Genre:
ISBN:

The recent debate over the role of prudential regulations in amplifying the cyclicality of bank lending focuses on two fundamental sources of it: capital adequacy regulations and loan loss provisioning system. Previous research shows that loan loss provisioning system can amplify the business cycle fluctuations, and its impact on it is even stronger than that of capital regulations. A dynamic model based on quarterly aggregated commercial banks data for the period 1998-2009 is used to determine if banking behavior, induced by the loan loss provisioning system in Poland, may amplify credit cycle fluctuations. The paper finds that provisioning in Poland is substantially higher when GDP growth is lower, which leads to the conclusion that Polish loan loss provisioning system is procyclical. This impact is not mitigated by earnings management.

Ratings, Rating Agencies and the Global Financial System

Ratings, Rating Agencies and the Global Financial System
Author: Richard M. Levich
Publisher: Springer Science & Business Media
Total Pages: 380
Release: 2012-12-06
Genre: Business & Economics
ISBN: 1461509998

Ratings, Rating Agencies and the Global Financial System brings together the research of economists at New York University and the University of Maryland, along with those from the private sector, government bodies, and other universities. The first section of the volume focuses on the historical origins of the credit rating business and its present day industrial organization structure. The second section presents several empirical studies crafted largely around individual firm-level or bank-level data. These studies examine (a) the relationship between ratings and the default and recovery experience of corporate borrowers, (b) the comparability of credit ratings made by domestic and foreign rating agencies, and (c) the usefulness of financial market indicators for rating banks, among other topics. In the third section, the record of sovereign credit ratings in predicting financial crises and the reaction of financial markets to changes in credit ratings is examined. The final section of the volume emphasizes policy issues now facing regulators and credit rating agencies.

The Economic and Financial Impacts of the COVID-19 Crisis Around the World

The Economic and Financial Impacts of the COVID-19 Crisis Around the World
Author: Allen N. Berger
Publisher: Elsevier
Total Pages: 520
Release: 2023-09-29
Genre: Business & Economics
ISBN: 044319162X

The Economic and Financial Impacts of the COVID-19 Crisis Around the World: Expect the Unexpected provides an informed, research-based in-depth understanding of the COVID-19 crisis, its impacts on households, nonfinancial firms, banks, and financial market participants, and the effectiveness of the reactions of governments and policymakers in the United States and around the world. It provides reflections and perspectives on the social costs and benefits of various policies undertaken and a toolkit of preventive measures to deal with crises beyond the COVID-19 crisis. Authors Allen N. Berger, Mustafa U. Karakaplan, and Raluca A. Roman apply their expertise to the research and data on the COVID-19 economic crisis as well as draw on their own rich research experience. They take a holistic approach that compares and contrasts this crisis with other economic and financial crises and assesses economic and financial behavior and government policies in the booms before crises and the aftermaths following them, as well as the crises themselves. They do all this with a keen eye on "Expecting the Unexpected” future crises, and policies that might anticipate them and provide better outcomes for society.