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To raise the quality of regulatory capital, Basel III capital rules recognize unrealized gains and losses on all available-for-sale (AFS) securities in Common Equity Tier 1 Capital (CET1). However, by examining the correlations between U.S. GDP growth rate, interest rates and regulatory capital ratios computed using Basel III regulatory capital definition for six U.S. global systemically important banks (G-SIBs) since 2007, this chapter finds that Basel III regulatory capital will enhance the pro-cyclicality of Basel III leverage ratio and Tier 1 capital ratio and their sensitivity to long-term interest rates. Therefore, Basel III capital standards may have significant implications for bank supervision and bank capital risk management in the near future. As banks will hold more high-quality liquid assets (HQLAs) as required by Basel III Liquidity Coverage Ratio (LCR), the weight of unrealized gains and losses arising from fair value accounting will increase in Basel III Tier 1 capital base, the consequent increase of pro-cyclicality in a bank’s regulatory capital ratios may distort the true picture of bank capital adequacy. If an expected loss approach (EL) is used as the provisioning model, such capital risk may be increased further. Moreover, as U.S. monetary policy has started tapering quantitative easing, long-term interest rates will increase inevitably. This may increase the negative impact of unrealized gains and losses on AFS securities on bank capital. As a result, it may be difficult for banks to maintain appropriate capital ratios to meet regulatory requirements and support business activities.

Seeks to present the detailed empirical study of contemporary business fluctuations in Korea. Follows the methodology of modern business cycle research in conducting an atheoretical statistical analysis of the cyclical properties of key aggregate time series. Shows, by analysis, that many of the cyclical regularities documented for developed countries also exist in Korean business cycles. Regularities include the relative volatilities of many expenditure components and the co‐movement of real and nominal variables with output. Particularly of note is the counter‐cyclicality of prices. Posits that counter‐cyclicality of prices signals the importance of supply side shocks in Korean business fluctuations. Reveals, in the analysis, that the fluctuation in the import price of oil may have been the major source of Korean business cycles. States that analysis has also revealed that there are some idiosyncrasies in Korean business cycles. Net exports are significantly pro‐cyclical and lead the cycle for most of the period under study.

The aim of this paper is to review the main results of accounting research literature examining the role of fair value accounting (FVA) within financial crisis. This research analyzes theoretical and empirical studies on the controversial topic about FVA and its alleged pro-cyclicality in the context of the financial crisis to offer solid reflections for improving the fair value research agenda.

This paper consists of a descriptive literature review. Theoretical and empirical research studies were investigated and then systematized in a framework to guide a literature-based analysis and critique of the relevant literature published about this topic.

The review reveals that there has been only a limited amount of research into the role of FVA within the financial crisis. This topic has not been researched extensively, and there is no empirical evidence that FVA caused the financial crunch and the subsequent financial crisis.

The restricted amount of literature that directly deals with FVA in the context of the financial crisis is the main limitation of this paper. The specificity of the theme narrows the coverage. However, the adopted research methodology enabled the main contributions concerning this issue to be collected, to realize a concise and comprehensive portrait of the debate surrounding FVA and the financial crisis.

This paper can be of use to both researchers and practitioners interested in investigating strengths and weaknesses of the fair value concept for accounting purposes. The paper sets out the main findings of the academic literature and identifies future avenues of theoretical and practical research which may support standard setters to draw up improved accounting regulation.

Few existing studies consist of a literature review that examines theoretical and empirical researches on the influence of FVA on the financial system. This review offers a comprehensive overview on research literature concerning the responsibility of FVA in causing the financial crisis. The main contribution of this paper relates to further understanding the role and effects of accounting matters concerning fair value in a broad sense within the context of the financial crisis.

The purpose of this study is to investigate the impact of International Accounting Standard 39 (IAS 39) on income-smoothing activities and pro-cyclical behavior through loan loss provisions using a sample of Hong Kong banks.

Fixed effects estimator is used, and the analysis covers the period from 2000 to 2009.

The results suggest that Hong Kong banks engage less in income-smoothing activity after they comply with the IAS 39. No evidence supports loan loss provisions of Hong Kong banks exhibiting more pro-cyclical behavior after IAS 39 adoption.

Compliance with IAS 39 should improve the quality of bank financial reporting. The reduction in income-smoothing activities among Hong Kong banks after IAS 39 adoption fairly supports the effectiveness of International Financial Reporting Standard (IFRS) and countries that have yet to comply with IFRS may take action to apply the standards. Bank regulators should take pro-active action in addressing the issue of pro-cyclicality of loan loss provisions, as IAS 39 focuses more on improving the financial information quality, while pro-cyclicality is associated with the economic cycles.

Hong Kong banking industry is unique, as it was among the first IFRS adopters in the East Asia region and it has its own legal framework for developing accounting standards. The results of this study are expected to shed some light on the effects of IAS 39 adoption on income smoothing and pro-cyclicality of banks in the East Asia region, where the accounting cultural value dimensions and institutional structures are different than that of European countries.

This study aims to investigate the relationship between financial inclusion and the business cycle.

Regression methodology is used to analyze the association between financial inclusion and the business cycle.

Using regression estimation, the findings reveal that the level of savings and the number of active formal account ownership are pro-cyclical with fluctuations in the business cycle. Also, savings by adults particularly for women and poor people declines during recessionary periods while the number of active formal account ownership declines for the adult population especially for women during recessionary periods. The findings also reveal that not all indicators of financial inclusion are pro-cyclical with fluctuating business cycles.

The implication of this observed pro-cyclical effect is that individuals and households will exit the formal financial sector during a recession, as banks become unwilling to lend money to individuals and households during bad times and this will lead to financial exclusion and vice versa. Policymakers seeking to increase the level of financial inclusion in their countries should focus on the timing of financial inclusion policies along the business cycle as the findings suggest that it might be more difficult to achieve financial inclusion objectives during recessions or periods of economic downturns.

The current debate on financial inclusion pays little attention to whether financial inclusion is pro-cyclical with the fluctuating business cycle. This study explores the association between financial inclusion and the business cycle.

The purpose of this paper is to take a forecasting approach to examine the relationship between the US birth rate, marriage rate, and economic conditions (measured by both realized unemployment and expected unemployment). The expectation data come from the Michigan Surveys of Consumers.

Utilizing monthly data, the authors first specify a univariate and three augmented autoregressive integrated moving average forecasting models for 1975-2001. Second, the authors use recursive estimation to generate multi-period forecasts of the birth rate for 2002-2008. Third, the authors employ standard evaluation methods to compare the predictive information content of the forecasts.

First, the birth rate is pro-cyclical. Second, the marriage rate contains useful predictive information for the birth rate. Third, controlling for past information in the birth and marriage rates, both realized and expected unemployment embody useful information for predicting the birth rate. Fourth, expected unemployment is a more informative indicator than realized unemployment.

The finding that the birth rate is pro-cyclical emphasizes the importance of economic stability in promoting childbearing, and the authors suggest counter-cyclical macroeconomic policy to shield families from major shocks. A stable economy, and especially one where families are optimistic about the future, promotes childbearing. The results also empower policymakers to analyze systematically the impact of changes to the structure of marriage on childbearing.

This appears to be the first study that utilizes a forecasting approach to better understand the complex relationships between childbearing, marriage, and macroeconomic conditions.

The aim of this paper is to disentangle the contemporaneous and non-contemporaneous relationship between regional business cycles and manufacturing productivity in a developing country, namely Colombia.

The methodology is quantitative. To deal with the problems of endogeneity in the production function and with the law motion of productivity (the Markov process), the authors obtain Total Factor Productivity (TFP) through the Wooldridge’s two equations system that can be jointly estimated under the generalized method of moments framework (GMM). Secondly, to avoid bias we estimate regional business cycles through the Kalman filter. Subsequently, we implement an instrumental variables/generalized method of moments regression (IV/GMM) to capture the contemporaneous and endogenous TFP–GDP cycles’ linkage at the regional level. Lastly, to deal with the non-contemporaneous link, the authors estimate a vector autoregressive model with exogenous variables (VARX) for each region. We also present the corresponding impulse–response functions.

The authors’ general results suggest a remarkable causality, both contemporary and non-contemporary, from productivity to GDP (but not vice versa) in the most developed regions of the country. This implied productivity could influence in the economic growth of regions in short and long runs. These results are different than those expected by economic theory and should be considered by local economic policy makers.

The authors consider that a more detailed analysis should be carried out at the level of each sector within the manufacturing industry to further clarify these findings.

The policy should be oriented to obtaining cutting-edge technologies through subsidies, and also should facilitate the access to financial capital and the investment in R&D laboratories. On the other hand, the link with international trade also must be reinforced because the importing of intermediate inputs and exporting of output allow the firms to obtain embodied technologies, also to incur on learning by exporting and importing processes and finally to gain experience and competitiveness in foreign markets.

The causality in the region that provides more than 50% of economic activity within the country (Third region) is only in one directional, from TFP towards gross domestic product (GDP) and not vice versa. As the influence from GDP towards TFP is minimal in the remaining regions, the manufacturing productivity influences both short and long run regional economic growth in Colombia. This implies that economic policy at the level of macro-region must be modified; the government should give additional support to the manufacturing sector, especially in developed regions and for the small and medium-sized enterprises (SMEs) (wich represent 92% of manufacturing firms) to increase economic growth in the future.

The authors’ contribution is threefold. First, they pay special attention to the contemporaneous cyclical relationship (i.e. pro-cyclical, counter-cyclical or acyclic) and the non-contemporaneous causality with productivity. Second, they estimate productivity with the GMM two equation system considering an endogenous Markov process. Third, to the best of their knowledge, at least in the case of Latin America, there are no studies in this direction combining these statistic methods, including that of Colombia.

This study examines and compares different specifications of the fiscal policy rule in the fiscal sustainability analysis of Nigeria.

This is methodologically achieved by estimating the baseline constant-parameter and Markov regime switching fiscal models. The asymmetric autoregressive distributed lag fiscal model is also employed to substantiate the differential responses of fiscal authorities to public debt.

The baseline constant-parameter fiscal model provides mixed results of sustainable and unsustainable fiscal policy. The inconclusiveness is adduced to instability in primary fiscal balance–public debt dynamics. This makes it necessary to capture regime switches in the fiscal policy rule. The Markov switching estimations show a protracted fiscal unsustainable regime that is inconsistent with the intertemporal budget constraint (IBC). The no-Ponzi game and debt stabilizing results of the Markov switching fiscal model further revealed that the transversality and debt stability conditions were not satisfied. Additional findings from the asymmetric autoregressive model estimation show that fiscal consolidation responses vary with contraction and expansion in output and spending, coupled with downturns and upturns in public debt dynamics in both the long and short run. These findings thus confirm the presence of asymmetries in the fiscal policy authorities' reactions to public debt. Further, additional evidences show the violation of the IBC which is exacerbated by the deleterious effect of the pro-cyclical fiscal policy response in boom on the improvement of the primary fiscal balance.

This study deviates from the extant literature by accommodating time variation, periodic switches and fiscal policy asymmetries in the fiscal sustainability analysis of Nigeria.

The purpose of this paper is to investigate if Jordanian banks using provision accounts as a technique to smooth income, manage capital ratio, signal future earning and test other determinants affecting provision accounts.

The study was conducted on all Jordanian listed banks, and it covers the period 2005-2014. Different models are applied to test the dependent variables (loan loss provision [LLP] accounts) and its effects on different explanatory variables by using several statistical techniques (e.g. multiple regression).

The results show that there is no conclusive evidence supports that Jordanian banks used provision to smooth income, manage capital ratio or engage in pro-cyclical behavior. However, a positive and significant effect between one year ahead change in earnings and loan loss allowance, indicating that banks may use provisions to signal future positive changes in earnings. In addition, the results show that loan-to-asset ratio and beginning loan loss allowance have positive effect on provision accounts.

The results of this study are useful in assisting the regulators (e.g. US Securities and Exchange Commission, central bank) in efforts toward improving the quality of the reported financial reporting in the banking industry and focus on LLP management motivations. This study gives shareholders further insight which enables them to better understand the actions of managers and thus increase their control over their investments. Additionally, auditors should be aware of different incentives for using LLP as a tool of earnings management to be able to detect eventual manipulation of accounting earnings.

Banking in is one of the most stringently regulated of sectors and, furthermore, has a major impact on other sectors and on economic growth in general. In view of such importance, this study focuses on the banking industry and contributes to the literature in several ways. First, it represents the first known study, to the best of author knowledge, which examines if Jordanian banks use LLP accounts as a tool to smooth income and/or to manage capital. Second, unlike most existing research, which usually studies one aspect of LLP, this study focuses on four main motivations influencing provision accounts in the banks of Jordan. Third, additional tests were carried out to check the robustness of results, for example, sensitivity analysis is used to examine the change of findings by repeating of tests after using different proxies. Fourth, as a difference from other studies, this study investigates the effects of global financial crisis of 2008 on income smoothing behavior of Jordanian banking sector. Fifth, this paper provides a timely contribution to the continuous debate of the effect of LLP on earnings management in a poorly exploited setting, emerging market context.

This paper aims to examine the interaction between fair-value accounting, asset sales and banks’ lending in booms and busts. Throughout, the author uses “fair value” and “mark-to-market” interchangeably, to denote an accounting regime where changes in the prices of banks’ assets affect regulatory capital. “Historic-cost accounting” has been used in the paper to denote an accounting regime where changes in asset prices do not affect regulatory capital.

The author built a model that examines how the accounting regime affects banks’ incentives to sell assets and how the impact of the accounting regime on asset sales affects lending.

In a bust, fair value strengthens banks’ incentives to sell assets. The resulting increase in sales increases banks’ lending capacity. Consequently, lending can be higher under fair value. Conversely, in a boom, historic cost strengthens banks incentives to sell assets. The resulting increase in sales increases banks’ lending capacity. Hence, lending can be higher under historic cost.

This paper identifies a new channel through which the accounting regime could affect lending. The accounting regime can affect banks’ incentives to sell assets. The resulting difference in sales can affect banks’ ability to make new loans. Hence, in a boom, although banks book mark-to-market gains under fair value, asset sales could be higher under historic cost. Lending, thus, could be higher under historic cost. Conversely, in a bust, although banks book mark-to-market losses under fair value, sales could be higher under fair value. Lending, thus, could be higher under fair value.