Abstract
This paper reviewed and analyzed the development of our nation’s loan loss provision system, then studied the relations of commercial bank loan loss provision and earnings management and capital management through empirical study. This paper selected 14 domestic commercial banks of year 2001-2009 as data sample, using Kanagaretnam et al.’s (2003) research method, dividing the loan loss provision into two parts that is discretionary and nondiscretionary part, and empirically studied the relationship of discretionary part of loan loss provision and earnings before taxes and provisions (EBTP) and capital adequacy ratio (CAR). Empirical results show that: there is significant positive correlation between the discretionary loan loss provisions and earnings before taxes and provisions (EBTP), and there is significant negative correlation between the discretionary loan loss provisions and capital adequacy ratio (CAR). That provides evidence for the relation of bank loan loss provision and earnings management and capital management. In the last, combining with empirical research findings and the status of the loan loss provision system of China’s commercial banks, this paper made several suggestions to improve the system of loan loss provision.
Highlights
Bank loan is one of the most important assets
This paper reviewed and analyzed the development of our nation’s loan loss provision system, studied the relations of commercial bank loan loss provision and earnings management and capital management through empirical study
The adequacy and accuracy of the extraction of bank loan loss provision affect the commercial bank’s actual disclosure of financial condition and operating results, and affect the risks related to the resilience of commercial banks, and have an impact on the sound operation of banks
Summary
The adequacy and accuracy of the extraction of bank loan loss provision affect the commercial bank’s actual disclosure of financial condition and operating results, and affect the risks related to the resilience of commercial banks, and have an impact on the sound operation of banks. The commercial banks should establish a scientific and rational system of loan loss provisions to address financial risks. As an asset impairment reserves, loan loss provision is a deduction item of accounting profits. Commercial bank loan loss provisions may affect the earnings management. The provision for loan losses is closely related to bank risks because general provisions can be included in supplementary capital, and specific provisions can be used as a deduction from risky assets. The loan loss provision is related to the regulatory capital adequacy ratio, which is probably related to capital management
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