The impact of the 1989 change in bank capital standards on loan loss provisions
Abstract
This paper examines the effect of a regulation change on management incentives and accrual estimates. The paper investigates whether managers of banks with low capital ratios reduce their banks' loan loss provisions after the 1989 change in capital standards. The loan loss provision has a positive effect on the capital ratio prior to 1989 and a negative effect after the change in capital standards in 1989. The model is designed to test the hypothesis that the loan loss provision captures the capital ratio management incentive after controlling for (1) non-discretionary factors in the loan loss provision decision such as gross loans and non-performing loans, (2) earnings management incentives, and (3) interest rates. The results support the hypothesis that managers of banks with low capital ratios reduced loan loss provisions during the 1990-1992 period compared to the 1985-1988 period. Banks with high capital ratios do not exhibit such a change. The managing behavior of loan loss provisions has implications for regulators, auditors, investors, and other users of the financial statements as they evaluate banks' financial statements.
Degree
Ph.D.
Advisors
Kross, Purdue University.
Subject Area
Accounting
Off-Campus Purdue Users:
To access this dissertation, please log in to our
proxy server.