Income smoothing management and loan loss provisions in the banking system

PurposeThe “public interest” of financial institutions was used as an argument to intervene in accounting practices. The Bank of Spain's standard was not compatible with International Accounting Standard (henceforth IAS) 39 and the Spanish banking sector had become one of the most provisioned i...

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Bibliographic Details
Published inThe journal of risk finance Vol. 24; no. 5; pp. 537 - 553
Main Authors Gómez-Ortega, Alba, Licerán-Gutiérrez, Ana, Horno-Bueno, Maria de la Paz
Format Journal Article
LanguageEnglish
Published London Emerald Publishing Limited 08.11.2023
Emerald Group Publishing Limited
Subjects
Accounting
Banking industry
Central banks
Credit risk
Economic growth
Financial services
International finance
Nonperforming loans
Provisions
Systems stability
Spain
Earnings decisions
Cyclicality
Loan loss provisions
Smoothing management
Banking
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Summary:PurposeThe “public interest” of financial institutions was used as an argument to intervene in accounting practices. The Bank of Spain's standard was not compatible with International Accounting Standard (henceforth IAS) 39 and the Spanish banking sector had become one of the most provisioned in Europe. This makes it an interesting case study of the relationship between provisioning and income smoothing. The 2008 financial crisis revealed that provisions were insufficient and a reinforcement regulation process began in 2012. This paper aims to examine whether, since 2012, the Bank of Spain's regulatory effort on impairment accounting standards has induced less income smoothing, correcting its countercyclical effect.Design/methodology/approachA regression model is applied during the period 2005–2020, to test whether there is a trend change in the correlation between the level of provisions and annual earnings in 2012.FindingsThe results show that from 2012 onwards (when the Bank of Spain reinforced the regulation on provisioning), there was a correction in income smoothing behaviour.Originality/valueThis study provides empirical evidence that reinforces the claim that accounting policy can affect decision-making accounting practices, in this particular case, at the Bank of Spain.
ISSN:1526-5943
2331-2947
DOI:10.1108/JRF-07-2023-0173