Banking sector earnings management using loan loss provisions in the Fintech era

Abstract

Purpose

This paper analyzes banking sector earnings management using loan loss provisions (LLPs) in the Fintech era.

Design/methodology/approach

Regression methodology was used to examine earnings management in the Fintech era.

Findings

The findings show evidence for bank income smoothing using LLPs. There is greater income smoothing in the second-wave Fintech era compared to the first-wave Fintech era, and the presence of strong institutions did not lower income smoothing in the second-wave era. Bank income smoothing is also greater in (1) Bank of International Settlement (BIS) and EU countries than in non-EU countries and G7 countries, (2) well-capitalized banking sectors and (3) during economic booms in the second-wave Fintech era.

Practical implications

The competition for loans and deposits by banks and Fintech lenders in the second-wave Fintech era created additional incentives for banks to engage in income smoothing to report competitive and stable earnings.

Originality/value

The study uses a unique approach to detect country-level earnings management in the banking sector. Also, this study extends the bank earnings management literature by introducing the Fintech era as a determinant of the extent of bank earnings management.

Citation

Ozili, P.K. (2022), "Banking sector earnings management using loan loss provisions in the Fintech era", International Journal of Managerial Finance, Vol. 18 No. 1, pp. 75-93. https://doi.org/10.1108/IJMF-07-2020-0369