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This study aims to test whether loan loss provisions in Islamic banks is procyclical by explicitly examining the link between non-discretionary provisions and loan growth. In the next stage, this paper tests whether the link between non-discretionary provisions and loan growth is conditional on bank capitalization and lending. This is to identify whether bank-specific factors affect the procyclicality of non-discretionary provisions and whether such procyclicality can be explained by income smoothing in banks with different capitalization and loan profiles.

This study is conducted in four stages. The first stage identifies the determinants of loan loss provisions. The second stage investigates whether income smoothing is affected by capitalization and lending activities. In the third stage, the link between non-discretionary provisions and loan growth is examined. In the fourth stage, this paper tests whether the link between non-discretionary provisions and loan growth is affected by bank capitalization and lending. A two-way panel-fixed effect model is used.

Non-discretionary provisions are procyclical, particularly for banks with lower capitalization and lending activities, because such banks do not conduct income smoothing. Specifically, banks with lower capitalization experience a decline in loan growth when non-discretionary provisions to cover credit risk increase.

The dataset used in this study follows Soedarmono et al. (2017) and does not enable to differentiate types of financing products in Islamic banks that may exacerbate or mitigate the procyclicality of non-discretionary provisions.

This paper extends prior literature on the procyclicality of loan loss provisions by specifically investigating the influence of non-discretionary provisions on loan growth in Islamic banks and whether such relationship depends on the role of income smoothing undertaken by banks with different levels of capitalization and lending. This paper builds on the work of Soedarmono et al. (2017) in which they do not explicitly examine the relationship between loan loss provisions and loan growth.

This paper examines the correlation of economic policy uncertainty (EPU) with nonperforming loans and loan loss provisions for 22 major developed countries over the 2008–2017 period.

The study used the Pearson correlation methodology to assess the correlation between EPU, bank nonperforming loans and loan loss provisions.

The findings reveal that EPU is negatively correlated with nonperforming loans and loan loss provisions in the banking sector of EU countries but not for non-EU countries. Also, EPU is negatively correlated with nonperforming loans in the banking sector of the most advanced economies – the G7 countries, while loan loss provisions are more responsive to changes in EPU than NPLs in EU countries.

The implication of the findings is that the correlation of EPU with loan loss provisions and nonperforming loans is influenced by regional characteristics.

This study is the first to analyze the association of EPU with bank nonperforming loans and loan loss provisions under regional classifications such as the EU, non-EU and the G7 countries. This study provides insights on how regional differences might explain the co-movement of EPU with bank nonperforming loans and loan loss provisions.

The purpose of this paper is to investigate the non-discretionary determinants of bank loan loss provisions in Africa after controlling for macroeconomic fluctuation, financial development and investor protection.

The author uses static and dynamic regression estimation to test for the determinants of bank loan loss provisions.

The author finds that non-performing loans (NPL), loan-to-asset ratio and loan growth are significant non-discretionary drivers of bank provisions in the African region. The author observes that bank provision is a positive function of NPL up to a threshold beyond which bank provisions will no longer increase as NPL increases. Also, bank loan-to-asset ratio is a significant driver of bank provisions when African banks have higher loan-to-asset ratios. The author finds that larger banks in financially developed African countries have fewer loan loss provisions while increase in bank lending leads to fewer bank provisions in countries with strong investor protection. Finally, higher bank lending is associated with higher bank provisions during economic boom.

This study is the first to assess the determinants of non-discretionary bank provisions in Africa as part of micro-prudential surveillance of banks in the African region.

The purpose of this study is to examine the impact of the reclassification of International accounting standard (IAS) 39 on income smoothing using loan loss provisions among European banks.

Regression methodology is used to determine the extent of income smoothing using loan loss provisions before and after IAS 39 reclassification. The authors predict that the strict recognition and re-classification requirements of IAS 139 reduced banks’ ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. The authors test this hypothesis over a sample of 114 European banking institutions over the period 2005 to 2013.

The findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period.

The implication of the findings is that the European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income. This implies that the International Accounting Standards Board’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis.

This study is the first attempt to analyze the effect of IAS 39 re-classification on bank’s ability to smooth income in Europe.

This study aims to examine the effect of equity incentives on earnings management that occurs via the use of loan loss provisions by using a sample of 204 bank-year observations over the period 2006-2011.

The authors use the data of 39 European banks to test the main hypothesis. Several valuation models and regressions are used to measure the main proxies for executives’ compensation and the determinant factors of loan loss provisions.

The empirical results reveal that earnings management that occurs via discretionary loan loss provisions is associated with equity incentives in the banking industry. In particular, European banks’ executives with high equity incentives are found to manage reported earnings upwards by reducing loan loss provisions. The results therefore show that income-increasing earnings management via discretionary loan loss provisions is widely practised by the executives of European banks and that this is partly motivated by executives’ compensation.

The findings of this paper present important implications for regulators in the European Union, who should take further steps to reform the regulatory environment to monitor and mitigate the earnings management practices that occur via the manipulation of loan loss provisions. Earnings management practices do not just negatively affect subsequent performance but are also found to lead to firms’ failure. Thus, regulators should take the necessary reforms to protect the wealth of stakeholders (investors, creditors, etc.).

This study provides the first evidence on the relationship between equity incentives and earnings management in the European banking industry. The study sheds more light on an issue of great interest to a broad audience that does not receive much attention in the prior research, thus opening new avenues for future research.

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.

The purpose of this paper is to examine the earnings management practices of Tunisian banks after the publication of the first International Monetary Fund (IMF) report (2002) over the period 1998-2007.

The study relies on a mixed model that combines both the quantitative and qualitative approaches. First of all, we use the quantitative method to measure the discretionary loan loss provisions based on the model of Cornett et al. (2009), and then we validate the quantitative findings by using the interview approach.

Since 2005, Tunisian banks have resorted less and less to accounting earnings management through the loan loss provisions, but conversely, real earnings management has been revealed instead by the sale of investment securities and the use of debt collection agencies. Despite the IMF recommendations, Tunisian banks continue to manage their earnings by changing only their strategies.

The findings of this study show that the regulation cannot avoid earnings management. Even if the regulation limits the discretion of the manager, the latter finds new alternatives to manipulate the earnings.

This is the first study that analyses the impact of the IMF recommendations on earnings management in an emerging economy.

Prior research demonstrates that share prices reflect a risk premium that is associated with earnings variability. This suggests that managers can reduce the cost of capital and increase share prices by reducing earnings variability. In this study, we investigate bank managers' use of discretion in estimating loan loss provisions (LLP) to reduce earnings variability. We find that banks with relatively high pre‐managed earnings have positive discretionary LLP and banks with relatively low pre‐managed earnings have negative discretionary LLP, results that are consistent with the hypothesis of earnings management to reduce earnings variability. In addition, we find that bank managers' decisions to reduce earnings variability are related to the need for external financing and to gains and losses on the sale of securities which serve as substitutes for accomplishing their objective of earnings variability reduction.

The purpose of this study is to examine the factors which affect loss provision for loans and investment in Murabaha, Musharka, and Mudarabah for banks in the Gulf Cooperation Council (GCC) region. The effect of prior period earnings, legal and statutory reserves, size of the bank, level of debt, and loan and investment to deposit ratio on the loss provisions of banks are examined for the period 2000‐2003.

To test the factors that explain the loan loss provision and to test the income smoothing hypothesis, debt to equity hypothesis, and reserve hypothesis, a single stage regression model was developed and tested.

The results indicate that when return on assets (ROA) before tax and loss provisions for the current year is higher than the prior year ROA and the actual capital reserve is below the legal required reserve, then management is expected to increase loss provisions for the current year. This result is robust for all the years of this study.

While prior research has examined the issue of the loan loss provision in USA, Japan, and Europe, no research has examined the issue of the loss provisions in the GCC region. This study demonstrates that the income smoothing hypothesis is relevant across different regulatory requirements, economic conditions, and different accounting standards. Managers of banks in the GCC region use the loss provision, among other things, to smooth earnings to achieve certain objectives.

This paper aims to derive determinants of loan loss provisions (LLPs) of commercial banks in Malaysia.

A single-stage panel data analysis multiple regression model that contains a mixture of quantitative and qualitative elements is used. The LLPs is a dependent variable or regressor, and non-performing loan (NPL), interest income, net profit, loans and advances and gross domestic product (GDP) are the independent variables or regressor/explanatory variables. The moderating variable is “credit risk management” (CRM) and the intervening variable is “relevance and faithful representation”.

This paper suggests in LLPs, NPLs, interest income, loans and advances, net profit and GDP, as well as the moderating effect of CRM and the intervening effect of relevance and faithful representation, are determinants of the LLPs. The moderating variable CRM strengthens the relationship between the independent variables and the dependent variable. The intervening variable “relevance and faithful representation” brings about a more accurate reporting on the levels of the LLPs.

The association of the factors is investigated further to detect possible effect of multicollinearity and research to better understand how banks manage their risk as the current investigation is limited to banks in Malaysia.

Loan loss provisioning issues of commercial banks in Malaysia are challenges for both regulators and the banking industry owing to the implementation of several new measures, the convergence with internationally accepted accounting standards and differences in loan grading and applications of different loan loss provisioning standards. Because of these challenges, Bank Negara Malaysia (the Central Bank of Malaysia) has tightened its supervision of commercial banks to ensure that banks are sufficiently and adequately provisioned. The banking sector plays a significant role, and it is important that it is resilient in the face of potential sources of systemic risk. And, like in other major ASEAN economies, the Malaysian’s financial system remains largely bank-dominated.

This study discovers whether Malaysian banks are sufficiently provisioned for the regional financial integration under the ASEAN Capital Markets Forum (ACMF) by the end of 2015, where several initiates have been initiated, including the harmonization of standards to encourage greater intra-regional investment flows and transactions and continued provisions of the much needed funds by the region’s private sectors.