Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Regulatory changes and loan loss provisions management by Chinese banks

Regulatory changes and loan loss provisions management by Chinese banks The authors examine whether Chinese banks use loan loss provisions (LLPs) for capital management, income smoothing and signaling purposes, and assess the effect of the recent regulatory changes following the implementation of Chinese Basel III on such behavior.Design/methodology/approachThe authors use a unique set of hand-collected data on bank capital combined with financial data downloaded from the China Stock Market and Accounting Research (CSMAR) database. Multivariate regression models are used to test our hypotheses.FindingsThe authors find that while there is no evidence to suggest capital management practice before the Chinese Basel III, the implementation of the new regulations induced listed banks to manage tier-1 capital via LLPs. The authors also find strong support that Chinese banks engage in income smoothing via LLPs management, and there is no change in such tendency following the issuance of Chinese Basel III. Lastly, the authors do not find support for the signaling behavior by Chinese banks using LLPs.Practical implicationsThe authors’ evidence suggests that elevated tier-1 capital and provisioning requirements may induce capital management by banks, which indicates a potential unintended effect brought forth by the new Basel regulations.Originality/valueTo the best of authors’ knowledge, this study is the first to examine Chinese banks' behavior relating to LLPs in terms of capital management, income smoothing and signaling. In particular, the authors use a sample containing a large number of Chinese commercial banks – previously a major data issue in other studies. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting in Emerging Economies Emerald Publishing

Regulatory changes and loan loss provisions management by Chinese banks

Download PDF
25 pages

Loading next page...
 
/lp/emerald-publishing/regulatory-changes-and-loan-loss-provisions-management-by-chinese-cCJSLGgVge
Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2042-1168
DOI
10.1108/jaee-05-2020-0116
Publisher site
See Article on Publisher Site

Abstract

The authors examine whether Chinese banks use loan loss provisions (LLPs) for capital management, income smoothing and signaling purposes, and assess the effect of the recent regulatory changes following the implementation of Chinese Basel III on such behavior.Design/methodology/approachThe authors use a unique set of hand-collected data on bank capital combined with financial data downloaded from the China Stock Market and Accounting Research (CSMAR) database. Multivariate regression models are used to test our hypotheses.FindingsThe authors find that while there is no evidence to suggest capital management practice before the Chinese Basel III, the implementation of the new regulations induced listed banks to manage tier-1 capital via LLPs. The authors also find strong support that Chinese banks engage in income smoothing via LLPs management, and there is no change in such tendency following the issuance of Chinese Basel III. Lastly, the authors do not find support for the signaling behavior by Chinese banks using LLPs.Practical implicationsThe authors’ evidence suggests that elevated tier-1 capital and provisioning requirements may induce capital management by banks, which indicates a potential unintended effect brought forth by the new Basel regulations.Originality/valueTo the best of authors’ knowledge, this study is the first to examine Chinese banks' behavior relating to LLPs in terms of capital management, income smoothing and signaling. In particular, the authors use a sample containing a large number of Chinese commercial banks – previously a major data issue in other studies.

Journal

Journal of Accounting in Emerging Economies – Emerald Publishing

Published: Jul 23, 2021

Keywords: Loan loss provision; Basel III; Chinese banks; Capital management; Earnings management; Signaling

References

  • Bank loan loss provisions: a reexamination of capital management, earnings management and signaling effects
    Ahmed, A.S.; Takeda, C.; Thomas, S.
  • Use of loan loss provisions for capital, earnings management and signalling by Australian banks
    Anandarajan, A.; Hasan, I.; McCarthy, C.
  • Basel III: a global regulatory framework for more resilient banks and banking systems
  • Regulatory consistency assessment programme – assessment of basel III regulations – China
  • Financial accounting in the banking industry: a review of the empirical literature
    Beatty, A.; Liao, S.
  • Managing financial reports of commercial banks: the influence of taxes, regulatory capital, and earnings
    Beatty, A.; Chamberlain, S.L.; Magliolo, J.
  • Earnings management to avoid earnings declines across publicly and privately held banks
    Beatty, A.L.; Ke, B.; Petroni, K.R.
  • Discretionary behavior with respect to allowances for loan losses and the behavior of security prices
    Beaver, W.H.; Engel, E.E.
  • Financial reporting, supplemental disclosures, and bank share prices
    Beaver, W.; Eger, C.; Ryan, S.; Wolfson, M.
  • The effects of focus versus diversification on bank performance: evidence from Chinese banks
    Berger, A.N.; Hasan, I.; Zhou, M.
  • Banks' procyclical behavior: does provisioning matter?
    Bouvatier, V.; Lepetit, L.
  • Release of ‘administrative measures for the loan loss reserves of commercial banks’
  • Public consultation of ‘administrative measures for the capital of commercial banks’
  • Release of ‘administrative measures for the capital of commercial banks (for trial implementation)’
  • Earnings management and capital resource allocation: evidence from China's accounting-based regulation of rights issues
    Chen, K.C.; Yuan, H.
  • Association between borrower and lender state ownership and accounting conservatism
    Chen, H.; Chen, J.Z.; Lobo, G.J.; Wang, Y.
  • Incorrect inferences when using residuals as dependent variables
    Chen, W.; Hribar, P.; Melessa, S.
  • Bank differences in the coordination of regulatory capital, earnings, and taxes
    Collins, J.H.; Shackelford, D.A.; Wahlen, J.M.
  • Shareholder litigation and ownership structure: evidence from a natural experiment
    Crane, A.D.; Koch, A.
  • Financial crisis and international supervision: new evidence on the discretionary use of loan loss provisions at Euro area commercial banks
    Curcio, D.; De Simone, A.; Gallo, A.
  • Governance, efficiency and risk taking in Chinese banking
    Dong, Y.; Girardone, C.; Kuo, J.M.
  • Reserve requirements and the bank lending channel in China
    Fungáčová, Z.; Nuutilainen, R.; Weill, L.
  • What explains the low profitability of Chinese banks?
    García-Herrero, A.; Gavilá, S.; Santabárbara, D.
  • Common errors: how to (and not to) control for unobserved heterogeneity
    Gormley, T.A.; Matsa, D.A.
  • CEO compensation and corporate risk: evidence from a natural experiment
    Gormley, T.A.; Matsa, D.A.; Milbourn, T.
  • Determinants of financial performance in Chinese banking
    Heffernan, S.A.; Fu, X.
  • Cross-border financing by the industrial sector increases competition in the domestic banking sector
    Jayaraman, S.; Kothari, S.P.
  • Joint tests of signaling and income smoothing through bank loan loss provisions
    Kanagaretnam, K.; Lobo, G.J.; YangANG, D.H.
  • Determinants of signaling by banks through loan loss provisions
    Kanagaretnam, K.; Lobo, G.J.; Yang, D.H.
  • The impact of the 1989 change in bank capital standards on loan loss provisions and loan write-offs
    Kim, M.S.; Kross, W.
  • New capital requirements for banks postponed
    King; Wood
  • Board characteristics and Chinese bank performance
    Liang, Q.; Xu, P.; Jiraporn, P.
  • Differential valuation implications of loan loss provisions across banks and fiscal quarters
    Liu, C.C.; Ryan, S.G.; Wahlen, J.M.
  • Loan loss reserves and income smoothing: the experience in the US banking industry
    Ma, C.K.
  • Capital adequacy ratio regulations and accounting choices in commercial banks
    Moyer, S.E.
  • Income smoothing among European systemic and non-systemic banks
    Peterson, O.K.; Arun, T.G.
  • Doing business and investing in China
  • China gives banks Basel III timetable
    Rabinovitch, S.
  • Tax planning, regulatory capital planning, and financial reporting strategy for commercial banks
    Scholes, M.S.; Wilson, G.P.; Wolfson, M.A.
  • Systemically important banks and capital regulations challenges
    Slovik, P.
  • Risk, capital and efficiency in Chinese banking
    Tan, Y.; Floros, C.
  • The nature of information in commercial bank loan loss disclosures
    Wahlen, J.M.
  • Do loan loss provisions affect the credit fluctuations in China's banking system?
    Wang, Z.; Xie, N.; Jin, Y.
  • Loan-loss provisions of commercial banks and adequate disclosure: a note
    Wetmore, J.L.; Brick, J.R.
  • Do more foreign strategic investors and more directors improve the earnings smoothing? The case of China
    Wu, M.W.; Shen, C.H.; Lu, C.H.
  • On the assessment of the performance in earnings management for the banking industry: the case of China's banks
    Wu, C.H.; Ding, C.G.; Wu, C.Y.