The impact of SFAS133 on income smoothing by banks through loan loss provisions

• Main Authors: Kilic, Emre, LOBO, Gerald J., RANASINGHE, Tharindra, Sivaramakrishnan, K.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2013
• Subjects: SFAS 133; Income Smoothing; Hedging; Derivatives; Loan Loss Provisions; Accounting; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/984; https://ink.library.smu.edu.sg/context/soa_research/article/1983/viewcontent/ImpactSFAS133Income_Smoothing_2013_pp.pdf
• Institution: Singapore Management University

We examine the impact of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, on the reporting behavior of commercial banks and the informativeness of their financial statements. We argue that because the stricter recognition and classification requirements of SFAS 133 reduced banks' ability to smooth income through derivatives, banks more affected by SFAS 133 will rely more on loan loss provisions to smooth income. We find evidence consistent with this argument. We also find that the increased reliance on loan loss provisions for smoothing income has impaired the informativeness of loan loss provisions.