Central bank digital currency and bank earnings management using loan loss provisions

Abstract

Purpose

This paper aims to analyse the role of central bank digital currency (CBDC) in bank earnings management and focus on how CBDC activity might influence banks to engage in accrual earnings management using loan loss provisions (LLPs) and the implications for earnings quality.

Design/methodology/approach

The paper used conceptual discourse analysis to explain the role of CBDC in bank earnings management.

Findings

Banks will use accruals, such as LLPs, to manage earnings when CBDC-induced bank disintermediation leads to a reduction in bank deposits, a reduction in bank lending and a likely reduction in reported earnings. Bank managers will mitigate the reduction in reported earnings by lowering discretionary LLPs to increase reported earnings.

Originality/value

The recent emergence of CBDC in the digital currency universe has led to increased research interest on the role of CBDC in corporations and society. This study contributes to the literature by focusing on banks, and examining the effect of CBDC on bank earnings management.

Citation

Ozili, P.K. (2023), "Central bank digital currency and bank earnings management using loan loss provisions", Digital Policy, Regulation and Governance, Vol. 25 No. 3, pp. 206-220. https://doi.org/10.1108/DPRG-11-2022-0139