عرضه وام و حفظ درآمد در بانک های ایالات متحده قبل و بعد از بحران های مالی Loan loss provisioning and income smoothing in US banks pre and post the financial crisis

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 2001–۲۰۰۹, 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 2002–۲۰۰۶ with the crisis period of 2007–۲۰۰۹, 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. ۱٫ Introduction Accounting standard setters have emphasized the measurement and transparency of loan loss provisions and the extent of discretion embedded in the estimation and timing of the provisions. From the regulatory perspective, the focus has been on whether the loan loss provisions are adequate to cover expected credit losses over the life of the loan. Lately, the validity of the current rules to account for loan losses is one of the most prevalent concerns. Since the banking crisis started in late 2007, the heat of the debate has been fueled with the massive losses hitting banks’ loan portfolios. The G20 leaders at their April 2009 summit called on for strengthening the banking regulation. They recommended that accounting standard setters work with bank regulators to improve provisioning standards. Motivated by the exacerbating debate on loan loss provisioning amidst the financial crisis of 2007, I investigate whether loan loss provisions of US bank holding companies are affected by income smoothing incentives during the period 2001–۲۰۰۹٫ Furthermore, I examine whether income smoothing behavior through loan loss provisions has changed, if any, from the boom period in the 2000s to the period of financial crisis of 2007–۲۰۰۹٫ First, I predict and find strong empirical support for income smoothing using loan loss provisions. Earnings are significantly associated with loan loss provisions after controlling for the regulatory capital management incentive pertaining to financial institutions. Moreover, I find that bank holding companies tend to engage increasingly in income smoothing when profitable and when threatened by hitting the regulatory minimum capital requirements. According to further tests, bank internally set regulatory capital targets are more significant than the regulatory‐set capital ratios to trigger income smoothing. I also find that banks tend to delay provisioning for loan losses they are in a recessionary period. Finally, I predict and find that during the boom period, banks use loan loss provisions to smooth income downwards. On the other hand, loans loss provisions are extensively used to smooth income upward during the financial crisis period. This paper contributes to the evidence on bank loan loss provisioning in a number of ways. First, I provide supporting evidence on the procyclicality inherent in the current loan loss provisioning model which is relevant to the debate pushing the International Accounting Standards Board (IASB) to change the rules of loan loss provisioning. Loan loss provisions cover expected loan losses, while regulatory capital is a buffer against unexpected losses. While procyclicality is the tendency of banks to increase (shrink) lending in periods of economic growth (downturn), the current backwardlooking model of loan loss provisions under the US Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) reinforces the tendency of banks to increase (decrease) loan loss provisions during recessionary (expansionary) periods. In recessionary periods, capital is tight and it is difficult for undercapitalized banks to raise external equity. Therefore, the losses hitting the regulatory capital base in periods of economic downturn magnify the costs of violating regulatory capital targets. Consequently, banks respond by shrinking lending and providing more for loan losses, which aggravates procyclicality. Hence, bank regulators have been urging accounting standard setters to consider changes in the accounting for loan loss provisions (Clark, 2010). Second, I use the regulatory capital ratio as a control to proxy for the regulatory capital management incentive pertaining to banks, uncontrolled for in prior literature. I decompose the regulatory capital ratio into two components: capital, the numerator that is affected by accounting equity, and risk-weighted assets, the denominator that has accounting and asset riskiness elements. Such a breakdown sheds light on the effects of regulatory capital versus risk-weighted assets on loan loss provisions and the relative use of each to manage provisions. Third, I examine the relative significance of the bank-specific internally set capital ratio versus the regulatory capital ratio set by Basel and the Federal Deposit Insurance Corporation (FDIC) in relation to accounting for loan losses to smooth income. Finally, this paper provides evidence on banks’ regulatory capital management income smoothing patterns prior to and during the financial crisis of late 2007. The paper is organized as follows: Section 2 provides background for the study. Hypotheses development is discussed in Section 3. I describe the research design in Section 4. Then, Section 5 introduces the sample and data. I discuss the empirical results in Section 6 and conclude in Section 7.