Determinants of bank income smoothing using loan loss provisions in the United Kingdom

Abstract

PurposeThis paper examines the determinants of bank income smoothing using loan loss provisions in the United Kingdom or Great Britain from 1999 to 2017.Design/methodology/approachThe study used ordinary least square (OLS) regression and applying the HAC robust standard error correction test.FindingsThe findings showed that UK banks use loan loss provision for income smoothing purposes. Income smoothing is greater in times of high economic policy uncertainty. The extent of bank income smoothing is reduced by foreign bank presence, UK GAAP adoption, IFRS9 adoption, and high levels of voice and accountability. Also, there is reduced income smoothing using loan loss provisions during a financial crisis and in periods of economic prosperity.Research limitations/implicationsThe implication is that economic conditions, institutional governance and accounting disclosure rules can influence the extent of bank income smoothing in the United Kingdom. The findings of the study contribute to several studies that explore the determinants of bank income smoothing.Originality/valueNo study has extensively examined the determinants of bank income smoothing in Great Britain or the United Kingdom. The present study fills this gap in the literature.

Malaysian Household Debt: The Impact of Covid-19 on Non-Performing Financing

“…The Newey-West estimator was employed with robust standard error to correct the OLS estimator often applied for time series data. Among others Kantur and Özcan (2021), Ozili (2022) and Ozili and Ndah (2021) employed Newey-West regression for the empirical investigation of time-series analysis. The chosen regression is also relevant to the potential heteroscedasticity issue.…”

What drives bank income smoothing? Evidence from Africa

“…For instance, in Africa, some countries have substantial number of foreign banks providing services that improve financial intermediation, thereby leading to greater financial development (Kablan, 2010), while other African countries impose restrictions on foreign bank entry and foreign bank activities (Clarke et al, 2003). Generally, foreign banks contribute to financial development (Claessens and Horen, 2014), but in Africa, the level of financial system development is largely uneven due to significant restriction on foreign bank entry (Ozili, 2017c). Foreign bank presence can increase competition, reduce profit margin for all banks (both foreign and domestic), and pressure all banks to report competitive earnings which can be achieved by smoothing their income.…”

“…We use some institutional indices which are available for African countries, and these variables include: "voice and accountability", "corruption control", "political stability and absence of violence/terrorism", "government effectiveness", "regulatory quality" and the "rule of law" indices. For instance, we expect that strong "voice and accountability" and strong "corruption control" should discourage income smoothing if these institutional controls encourage a strong disclosure culture and whistleblowing against corporate misconduct within African firms thereby making it difficult for managers to manipulate financial reports for income smoothing purposes (Ozili, 2017c). Similarly, we expect that higher "government effectiveness", "regulatory quality" and "rule of law" should discourage income smoothing if these institutional controls give bank supervisors the needed powers to regulate and discipline rule-breaking banks.…”

The relationship between income smoothing and the cost of debt: evidence from the United Kingdom and Nigeria

“…Moreover, the UK debt market is characterized by lower interest rates, higher competition among banks and higher level of bank concentration, which could affect banks' monitoring of corporate reporting irregularities (Ozili, 2022). Besides, the UK market is attributed with some unique contextual and institutional issues such as lower political involvement in accounting issues, the adoption of higher quality accounting standards, gradual improvement in the control of the corruption index and voice and accountability IJAIM 31,3 index, lower litigation costs and lower public debt issuance (Ball et al, 2000;Ozili, 2022). It also has different governance, disclosure and listing requirements (such as auditor liability and types of prohibited audit services) (Gerakos et al, 2013;Alhadab, 2018).…”

“…Firms in this context are less likely to manipulate their earnings to meet analysts' expectations because of their relatively high costs (Zalata and Roberts, 2017). Ozili (2022) found that the use of income smoothing by British banks is higher in cases of high economic policy uncertainty and lower in cases of foreign banks presence, UK GAAP adoption and higher levels of accountability. Considering this, we formulate H1 as follows:…”