The nexus between IFRS 9 and rule of law on banks' earnings volatility

This dissertation comprises three distinct chapters. The first chapter examines whether accounting quality improves for firms voluntarily adopting IFRS by using a single country setting of Swiss firms. The Swiss setting enables isolating the effect of the change from accounting standards from changes in reporting enforcement. I find that voluntary adopters exhibit significant improvement in accounting quality metrics in the post-adoption period. Classifying the adopters in non-serious or serious adopters based on their actual reporting changes around the adoption, I find that the non-serious adopters do not face accounting quality improvements in the post-adoption period. Overall, the evidence points towards the explanation that accounting quality is mainly shaped by reporting incentives. The second chapter examines the new Expected Credit Loss (ECL) model’s impact on the predictability of loan loss provisions (LLP) and potential market discipline consequences. I examine whether the arguably less objective LLP under IFRS 9 obscure market participants’ ability to monitor the banks’ risk-taking incentives. The empirical findings suggest a decrease in the association between loan loss provisions and the incurred loss model determinants in the post-IFRS 9 period, i.e., LLP are based less on objective determinants after IFRS adoption. Furthermore, I find a decrease in the sensitivity of leverage to changes in risk in the post-adoption period of IFRS 9, indicating an attenuated market discipline over banks’ risk-taking. In contrast, I find no changes in the determinants of LLP and market discipline for the benchmark sample of U.S. banks, which were not subject to similar accounting changes during the sample period. The third chapter examines whether banks change the accounting designation of derivatives after ASU 2017-12. I investigate the impact of the new standard on earnings volatility within different groups of derivative users. Using detailed quarterly data on financial derivatives for bank holdings, I find that the level of earnings volatility and the ASU 2017-12 influence the banks’ decisions to use hedge accounting. In assessing the impact within groups of derivative users, I find evidence that banks that designate derivatives for hedge accounting purposes exhibit a lower level of earnings volatility around the adoption of ASU 2017-12 as opposed to banks that elect not to apply hedge accounting. I also find that banks that elect to use hedge accounting for the first time after adopting the standard update exhibit decreased earnings volatility. Overall, the findings confirm the FASB’s initial intention of introducing the accounting standard’s update.

Non-performing loans can impact the loan loss provisions of the banking industry. The sample of this research was collected from three banks: PT Bank Negara Indonesia (Persero) Tbk, PT Bank Rakyat Indonesia (Persero) Tbk, and PT Bank Mandiri (Persero) Tbk, for the period of 2013-2018. There were 72 data, 24 from each of the banks. The analysis was carried out using multiple linear regression and Sobel path analyses. The results showed that Capital Adequacy Ratio had a significant positive effect on Non-Performing Loans. Interest rates did not significantly affect Non-Performing Loans. Non-Performing Loans did not significantly affect Loan Loss Provision. Capital Adequacy Ratio had a significantly positive effect on Loan Loss Provision. Interest rates did not significantly affect Loan Loss Provision. Foreign exchange rates (USD against Rupiah) did not significantly moderate the positive effect of the Capital Adequacy Ratio on the Loan Loss Provision. USD exchange rates significantly moderated the negative effect of Non-Performing Loans on Loan Loss Provision. The interaction between the USD exchange rate and Non-Performing Loans negatively affected Loan Loss Provision. Foreign exchange rates did not significantly or positively moderate the effect of interest rates on Loan Loss Provision. Non-Performing Loans significantly mediated the positive effect of Capital Adequacy Ratio on the Loan Loss Provision. In other words, the positive effect of the Capital Adequacy Ratio on Loan Loss Provision is more positive when Non-Performing Loans increase, and vice versa. Non-Performing Loans did not significantly mediate the negative effect of interest rates on Loan Loss Provision, or the negative effect of interest rates on the Loan Loss Provision would be more negative when the Non-Performing Loans decreases, and vice versa.
 

This study examines earnings quality and the effects of Corporate Governance (CG) towards earnings quality in Islamic and Conventional Banks. Earnings quality in this study analyzed by investigating earnings volatility that affect the predictability of earnings and by detecting income smoothing using loan loss provision. Bank’s earnings volatility predicted to increase because the financial instruments are reported using fair value method after PSAK 50/55 revision. Previous studies report that bank’s manager use their accrual discretion to manage earnings volatility by smooth their income. Using samples of Islamic and conventional banks from period 2007-2014 and pooled least square method, this study finds that earnings volatility only significant in conventional banks’s acccrual discretion. Earnings volatility has no effect on Islamic banks’s accrual discretion. However, the income smoothing is significant in Islamic and conventional banks. CG mechanism which is measured using self-assessment scores proven to weaken the income smoothing on both banks. This study also finds that difference in CG self-assessment mean value score is significant on both banks.

This study explored the determinants of the capital structure in selected Chinese industries for a period of seven years (from 2011- 2016). Using the ex-post facto design, secondary data was collected from the Chinese Stock Exchange (CSE), seven determinants of capital structure were analyzed. These determinants are growth opportunities, size, profitability, and tangibility and non-debt tax shields, ownership structure and sales revenue. The Trade-off theory and Pecking Order theory were employed as the theoretical anchorage of the study. Panel data was used to construct the model with accompanying descriptive statistics such as means and standard deviation and inferential statistics such as Correlation matrix, F-test, Hausman test, LM test, two-stage least squares (2SLS) and General Method of Moments (GMM) to establish endogeneity. Empirical results from the study showed that the growth opportunities generally had direct influence on short-term debt levels and inverse correlation with total debt ratio and long-term debt ratio which pre-empts that all leverage measures are not same and would have a dissimilar and unique impact on the explanatory variables. Same relation was observed for all the variables especially - volatility of earnings, non-debt tax shield and ownership structure in terms of association and effect. The regression results showed that company size and capital structure are directly correlated while volatility of earnings and capital structure are inversely related. Keywords: Capital Structure, Trade off theory, Pecking Order Theory DOI : 10.7176/EJBM/11-8-02 Publication date :March 31 st 2019

This aim of research is to prove that the loan-loss provision and fair value accounting influence the earnings volatility and the accrual management role in moderating the effect of fair value accounting to earnings volatility. Data were obtained from the annual report of the Directory of Indonesia Capital Market and the Stock Exchange of Indonesia Website. There are 81 samples as a result of a banking company's observation listed on the Stock Exchange in 2014-2016. The analysis of multiple moderated regression was used in this research. Finally, it showed that the loss-loan provision does not affect on earnings volatility, whereas the fair value accounting influenced earnings volatility positively. On the other hand, accrual management strengthens the influence of fair value accounting on earnings volatility Keywords: loss-loan provision, fair value accounting, profit volatility, and accrual management DOI : 10.7176/RJFA/11-2-16 Publication date: January 31 st 2020

The study examines the significant factors affecting the capital structure decisions for banks’ in MENA region. An unbalanced panel data comprising of 132 banks operating in fifteen different countries of the MENA region from 2012 to 2017, data was extracted from Bank Scope resulting in 891 bank year observations. Macroeconomic indicators and institutional characteristics data has been taken from World Bank and World Bank governance indicators database and financial freedom data has been collected from heritage foundation. We use the two-step system Generalized Method of Moments (GMM) to explore the relationship between dependent and explanatory variables. The regression outcome between profitability and leverage shows a negative and significant relationship. No significant association between tangibility and leverage is found. Earnings volatility is negatively and significantly related to leverage. The relationship between growth and leverage is negative and significant. Macroeconomic indicators GDP growth and inflation show a positive relationship with leverage. Finally, the institutional factors, that is, government effectiveness, political stability, and rule of law have positive association with leverage. The study results will lend a hand to bank managers to make value-maximizing financing decisions to achieve an optimal capital structure. It will also help the policymakers to articulate an effective regulatory framework in the region. As per our knowledge, this is the first study to explore the determining factors of capital structure for banks operating in the MENA region. Moreover, the findings from MENA region banks could also support the comparative study with other regional blocks.

The Impact of IFRS 9 on Banks’ Loan Loss Provisioning

PurposeThis 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.Design/methodology/approachThe study used the Pearson correlation methodology to assess the correlation between EPU, bank nonperforming loans and loan loss provisions.FindingsThe 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.Practical implicationsThe implication of the findings is that the correlation of EPU with loan loss provisions and nonperforming loans is influenced by regional characteristics.Originality/valueThis 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.

Background: The central bank closely examines the loan loss provision maintained by Nepalese commercial banks in order to minimize potential losses resulting from a rise in non-performing loans, which reduces bank capital and squeezes the profitability and sustainability of banks. Establishing the relationship between loan loss provision and profitability is crucial in assessing the financial performance and risk management effectiveness of commercial banks. This analysis enables banks to minimize loan loss provisions, reinforcing profitability and ensuring long-term sustainability through the implementation of appropriate credit policies. Objectives: This research aims to analyses the influence of loan loss provision on the profitability of commercial banks in Nepal. The study also takes into account pertinent variables: non-performing assets, loans and advances to total deposits, and capital adequacy which may affect the relationship. Methods: This study has used both the descriptive and causal-comparative study approaches. The study used a panel data set consisting of 105-year observations, spanning from fiscal year 2017/18 to 2021/22, including 21 presently active commercial banks.The return on assets (ROA) is the dependent variable and loan loss provision (LLP) is an independent variable. The Fixed Effect (FE) panel regression has been chosen as an appropriate model as suggested by the Haussmann test. Results: A panel regression model has found a negative and substantial connection between the provisions for loan losses with the Nepalese commercial banks’ profitability. Conclusion: The study concluded that the increased provision for loan losses adversely affects the profitability of commercial banks in Nepal. Therefore, commercial banks should carefully evaluate their loan portfolios, carry out thorough credit risk assessments, and adopt sensible policies to maximize profit and ensure financial stability.

Through the collection and disbursement of money, banks often face the risk of default of the loan. These Non-Performing loans (NPLs) should be identified and cared for avoiding vulnerability to other risk. Banks may mitigate this risk using loan loss provisioning (LLP). Using the aggregate data of 56 commercial banks in the last 9 years (2009-2017), this study attempts to evaluate the Impacts of LLP maintained for NPLs on profitability, as it may help to take the level of the LLP, and NPLs in the optimum level of business success. The dependent variables used in this study are Non-Interest Income to Total Assets and Net-Interest Income to Total Assets as a representative of the profitability of a bank. The dependent variables are analyzed using Least Square Multiple Regression on three independent variables, which were Gross NPL to Total Loans Outstanding, Loan Loss Provision Maintained, and Surplus/ (Shortfall) resulted from the required loan provisioning. The result showed that the profitability is very significantly influenced by the independent variables. NPLs and LLPs maintained by the commercial banks negatively related with the profitability of the business, especially LLPs shown statistical significance to impact on profitability negatively. it is better to take the LLPs and NPLs in the minimum level for maximum profitability of banks.

Earnings volatility and audit report lag

This study aims to examine the nexus between bank-specific factors and non-performing loans, comparing the level of activities managers undertake towards non-performing loans, using data from Canadian and United States banks. There has been a lack of comparative studies researching the effect of bank-specific factors on non-performing loans in Canada and the United States in a single study of lending behavior and the extent of manager efficiency in mitigating the issue of non-performing loans. Consequently, in bridging the gap in the literature and contributing to knowledge, this study examines the effect of bank-specific factors on non-performing loans using a panel regression analysis of standard fixed and Driscoll-K fixed effects. The study explored credit growth, loan loss provisions, bank diversification, operating efficiency, net interest margin, and return on assets as the explanatory variables to measure bank-specific factors. The results of the regression showed that, comparatively, loan loss provisions, bank diversification, operating efficiency, and net interest margin exhibited positive and significant effects on non-performing loans, whereas credit growth and return on assets exerted negative effects on the non-performing loans of banks listed on the Toronto Exchange. On the other hand, while bank diversification, operating efficiency, and net interest margin exhibited positive and significant effects, credit growth, loan loss provisions, and return on assets exerted negative effects on the non-performing loans of banks listed on the New York Stock Exchange. The study recommends that managers implement stringent credit risk assessment frameworks and ensure a loan monitoring system to proactively manage and reduce non-performing loans.

The capital adequacy ratio, credit to deposit ratio, bank size, leverage ratio, loan loss provision, and non-performing loans were assessed for determining the relationships within domestic and joint venture commercial banks in Nepal. Using secondary data from 10 commercial banks spanning 2006/09 to 2019/20, totaling 140 observations, the study employs descriptive and regression analyses. Data sources include NRB's Banking and Financial Statistics, annual supervision reports, and selected banks' annual reports. HBL has the highest average non-performing loan (2.56%), while NIC Asia has the lowest (0.23%). SCBL exhibits the highest average capital adequacy ratio (15.92%), and SBL leads in credit to deposit ratio (86.85%). EBL tops in bank size (Rs 85,327 million), and MBL in leverage ratio (19.39%). HBL records the highest loan loss provision ratio (1.49%), with NBL at the lowest (0.32%). Descriptive statistics reveal the mean non-performing loan for domestic banks (1.12%), joint venture banks (1.22%), and overall banks (1.17%). The correlation analysis indicates negative correlations between capital adequacy ratio, bank size, credit to deposit ratio, leverage ratio, and loan loss provision with non-performing loans. Regression results underscore the significance of leverage ratio and loan loss provision in impacting non-performing loans for overall banks, while domestic banks find significance only in loan loss provision. Joint venture banks show significance in leverage ratio and loan loss provision. Keywords: Credit risk, Commercial banks, Nepalese banking sector, Leverage ratio, Loan loss provision, Capital adequacy ratio, Descriptive analysis, Regression analysis.

This study examines the factors affecting for the deposit mobilization in Nepalese commercial banks. Return on assets and return on equity are the dependable variables. The selected independent variables are bank size, capital adequacy ratio, credit to deposit ratio, loan loss provision, non-performing loan. The study is based on data of 19 Nepalese commercial banks for the period from 2016/17 to 2021/22. Secondary data are used to extract the information from factors affecting for the deposit mobilization in Nepalese commercial banks. The regression models are estimated to test the significance and importance of factors affecting for the deposit mobilization in Nepalese commercial banks. The study showed that there are negative impact of non-performing loan and capital adequacy ratio on return on equity. It indicates that increase in non-performing loan and capital adequacy ratio leads to decrease in return on equity. Similarly, there are positive impact of non-performing loan and capital adequacy ratio on return on assets. It indicates that increase in non-performing loan and capital adequacy ratio leads to increase in return on assets. The result shows that there is a positive impact of credit to deposit ratio on return on assets and return on equity. It indicates that increase in credit to deposit ratio leads to increase in return on assets and return on equity. Likewise, loan loss provision and bank size have a positive impact on return on equity. It indicates that increase in loan loss provision and bank size leads to increase in return on equity. Similarly, loan loss provision and bank size have a negative impact on return on assets. It indicates that increase in loan loss provision and bank size leads to decrease in return on assets.

This paper examines the relationship between loan loss provisions (LLP) in connection with bank profitability, bank liquidity and bank capital. We investigate loan loss provisions (LLP) of Islamic banks in Malaysia and the Gulf Cooperation Council (GCC). This paper seeks to analyze a full-fledged Islamic banking system operating on a parallel basis with a full-fledged conventional system. The sample micro balance panel data analysis comprises a total of 196 Islamic banks covers the period 2006-2012. Analysis was carried out via Generalized Methods of Moments (GMM) model. The authors estimate Generalized Methods of Moments (GMM) models perfectly to overcome endogeneity problems. The evidence remains valid for all instrument used in this study, including loan loss provisions, total deposit ratio, equity loan ratio, and return on average equity and gross domestic products. The empirical result shows loan loss provisions (LLP) is found to be statistically significant for our full samples and GCC Islamic banks but not in the case of Malaysian Islamic banks.