Regulatory pressure and income smoothing by banks in response to anticipated changes to the Basel II Accord

Lim, Chu Yeong; Yong, Keng Kevin Ow

doi:10.1016/j.cjar.2016.08.003

Cited by 12 publications

(9 citation statements)

References 20 publications

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“…They examine 770 insurance firms operating in 87 countries over the period 2000 to 2009 period and find evidence for income smoothing, however, the extent of income smoothing is reduced among banks in countries that have better investor protection, strict regulation and supervision. Lim and Yong (2017) examine the effects of the revised Basel II rules on bank managers' discretion to smooth income via LLPs, and they find that under-capitalised banks engage in greater income smoothing while well-capitalised banks engage in less income smoothing during the Basel II period. In Europe, Ozili (2017a) investigate whether discretionary loan loss provisioning by Western European banks is driven by income smoothing or credit risk considerations in the post-financial crisis period and find that discretionary provisioning by Western European banks is driven by both income smoothing and credit risk considerations in the post-financial crisis period.…”

Section: Literature Reviewmentioning

confidence: 99%

Bank income smoothing in South Africa: role of ownership, IFRS and economic fluctuation

Ozili¹,

Outa

2018

IJOEM

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Purpose The purpose of this paper is to examine the determinants of the use of loan loss provisions (LLPs) to smooth income by banks in South Africa. More specifically, the authors examine the influence of ownership, IFRS disclosure rules and economic fluctuation on the income smoothing behaviour of South African banks while controlling for the traditional determinants of bank income smoothing via LLPs. Design/methodology/approach The study employs fixed effect regression methodology to estimate the determinants of discretionary LLPs. Findings The authors find that South African banks do not use LLPs to smooth income when they are: under-capitalised, have large non-performing loans and have a moderate ownership concentration. On the other hand, income smoothing is pronounced when South African banks are rather more profitable during economic boom periods, well-capitalised during boom periods and is pronounced among banks that adopt IFRS and among banks with a Big 4 auditor. The authors also find that banks use LLPs for capital management purposes, and bank provisioning is procyclical with economic fluctuations. Practical implications Bank supervisors in South Africa should monitor the bank provisioning practices in South Africa closely to ensure that LLPs are not used as a substitute for bank capital. Banks in South Africa should not use sufficient provisioning as a substitute for sufficient bank capital. Second, the evidence for procyclical bank provisioning shows that provisioning by South African banks reinforce the current state of the economy and might compel bank supervisors in South Africa to consider the adoption of a dynamic provisioning system that is already adopted by bank supervisors in Spain, Peru, Uruguay, Colombia and Bolivia. Originality/value Bank income smoothing is an important issue because it has implications for banking stability and accounting transparency. There are few studies on bank income smoothing for emerging economies particularly in Africa where there are substantial differences in ownership and accounting rules. This is the first South African study to examine the influence of disclosure rules, ownership and economic cycle fluctuations on bank income smoothing behaviour via LLPs.

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Section: Literature Reviewmentioning

confidence: 99%

Bank income smoothing in South Africa: role of ownership, IFRS and economic fluctuation

Ozili¹,

Outa

2018

IJOEM

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“…A bunch of previous research in this regard has been innovated in terms of sample size or geographic area. Some of studies have been at the level of banking industry of a country (such as those of (Banker, Chang, & Lee, 2010)in the Korean banking industry, (Gordon, Baptista, & Yan, 2014), and (Gordon, Baptista, & Yan, 2014)in the US banking industry), others are at the level of the banks of a region (such as those of (Haque & Brown, 2016)in the Middle East banks, (Teixeira, Silva, Fernandes, & Alves, 2014)in European and US commercial banks, (Lim & Yong, 2016)in European banks, the United States, Canada and Australia), or at the level of the entire the world banks (such as the work of (Delis, Molyneux, & Pasiouras, 2011)in 22 commercial banks across different countries). From this perspective present research innovation is to choose among developing countries based on the IMF's 2015 annual report.…”

Section: Research Backgroundmentioning

confidence: 99%

The Effect of Commerce-Finance-Banking Linkage Restrictions on Banksassets Quality: The Case of Developing Countries

Mazaheri¹,

Shirkavnd²,

Jamali³

2018

JIBE

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The purpose of this study is to investigate the effect of banks non-bank financial and commerce activities restrictions on their assets quality in developing countries from 2000 to 2012. The researchsampleincludes the banking systemsof 108developing countries. The dependent variable is the ratio of non-performing loan to total assets of banks (proxy of assets quality), and independent variables include proxies of non-bank financial (banking-financelinkage) and commerceactivities (banking-commercelinkage) restrictions including insurance, capital market, real estate and investment in non-financial firms. The research also control for the effect of some country-specific and industry-specific variables. Due to the endogeneity problem of the variables, dynamic panel data and GMM are used for analyzing data. The results show that tighterrestrictions on the non-bank financial activities (insurance, real estate and real estate) generally havesignificant negative effect on banks assets quality. Securities market activities restrictions also have a significant negative effect on banks assets quality. In contrast, the increases in insurance and real estate activities restrictions havesignificant positive effect on banks assets quality. Increasing the stringency of banks commerce activities restrictions does improve banks assetsquality.

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“…Ozili (2017) showed that NIM significantly affected income smoothing. However, Lim and Yong (2017) suggested the opposite results. The gap exists because the differences and the researcher wants to examine it in this research.…”

Section: Introductionmentioning

confidence: 96%

Probability Factors Affecting Income Smoothing in Banks in 2010−2016

Dewi

2018

Binus Business Review

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The purpose of this research was to examine profitability factors in banking that affected income smoothing. Profit is the most important number for readers in making the economic decision. This research used probability factors that affected income smoothing in the bank. Probability ratio testing used Return on Assets (ROA), Return on Equity (ROE), Net Interest Margin (NIM), and Operating Expense Ratio (OER). The population was all banks listed in Indonesian Stock Exchange in 2010-2016. The sample was 203 data obtained through purposive judgment sampling. Using Logistic Binary Regression from SPSS version 20, Eckel Index was used to determine which companies smooth its income. The result shows that ROA, NIM, and OER are significant to income smoothing. However, ROE does not affect income smoothing significantly.

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Regulatory pressure and income smoothing by banks in response to anticipated changes to the Basel II Accord

Cited by 12 publications

References 20 publications

Bank income smoothing in South Africa: role of ownership, IFRS and economic fluctuation

Bank income smoothing in South Africa: role of ownership, IFRS and economic fluctuation

The Effect of Commerce-Finance-Banking Linkage Restrictions on Banksassets Quality: The Case of Developing Countries

Probability Factors Affecting Income Smoothing in Banks in 2010−2016

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