Do Loan Loss Reserves Behave like Capital? Evidence from Recent Bank Failures
Regulatory capital guidelines allow for loan loss reserves to be added back as capital. The evidence in this paper suggests that the influence of loan loss reserves added back as regulatory capital (hereafter referred to as “add-backs”) on bank risk cannot be explained by either economic principles...
Saved in:
Main Authors: | , |
---|---|
Format: | text |
Language: | English |
Published: |
Institutional Knowledge at Singapore Management University
2014
|
Subjects: | |
Online Access: | https://ink.library.smu.edu.sg/soa_research/1180 https://ink.library.smu.edu.sg/context/soa_research/article/2179/viewcontent/LoanLossReservesBehaveCapital_2014_pp.pdf |
Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
Institution: | Singapore Management University |
Language: | English |
id |
sg-smu-ink.soa_research-2179 |
---|---|
record_format |
dspace |
spelling |
sg-smu-ink.soa_research-21792020-01-12T00:20:18Z Do Loan Loss Reserves Behave like Capital? Evidence from Recent Bank Failures NG, Jeffrey Roychowdhury, Sugata Regulatory capital guidelines allow for loan loss reserves to be added back as capital. The evidence in this paper suggests that the influence of loan loss reserves added back as regulatory capital (hereafter referred to as “add-backs”) on bank risk cannot be explained by either economic principles underlying the notion of capital, or accounting principles underlying the recording of reserves. Specifically, we observe that in sharp contrast to the economic notion of capital as a buffer against bank failure risk, add-backs are positively associated with the risk of bank failure during the recent economic crisis. Further the positive association of add-backs with bank failure risk is concentrated among cases in which the add-backs are highly likely to increase a bank’s total regulatory capital. The evidence cannot thus be fully explained by accounting principles either, since the role of loan loss reserves according to those principles does not depend on whether the reserves generate a regulatory capital increase. Additional analysis suggests that the observed influence of loan loss reserves on bank failure risk may be an unintended consequence of their regulatory treatment as capital. 2014-09-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soa_research/1180 info:doi/10.1007/s11142-014-9281-z https://ink.library.smu.edu.sg/context/soa_research/article/2179/viewcontent/LoanLossReservesBehaveCapital_2014_pp.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Accountancy eng Institutional Knowledge at Singapore Management University bank failure bank risk regulatory capital capital adequacy loan loss reserves loan loss provisions Accounting Finance and Financial Management |
institution |
Singapore Management University |
building |
SMU Libraries |
continent |
Asia |
country |
Singapore Singapore |
content_provider |
SMU Libraries |
collection |
InK@SMU |
language |
English |
topic |
bank failure bank risk regulatory capital capital adequacy loan loss reserves loan loss provisions Accounting Finance and Financial Management |
spellingShingle |
bank failure bank risk regulatory capital capital adequacy loan loss reserves loan loss provisions Accounting Finance and Financial Management NG, Jeffrey Roychowdhury, Sugata Do Loan Loss Reserves Behave like Capital? Evidence from Recent Bank Failures |
description |
Regulatory capital guidelines allow for loan loss reserves to be added back as capital. The evidence in this paper suggests that the influence of loan loss reserves added back as regulatory capital (hereafter referred to as “add-backs”) on bank risk cannot be explained by either economic principles underlying the notion of capital, or accounting principles underlying the recording of reserves. Specifically, we observe that in sharp contrast to the economic notion of capital as a buffer against bank failure risk, add-backs are positively associated with the risk of bank failure during the recent economic crisis. Further the positive association of add-backs with bank failure risk is concentrated among cases in which the add-backs are highly likely to increase a bank’s total regulatory capital. The evidence cannot thus be fully explained by accounting principles either, since the role of loan loss reserves according to those principles does not depend on whether the reserves generate a regulatory capital increase. Additional analysis suggests that the observed influence of loan loss reserves on bank failure risk may be an unintended consequence of their regulatory treatment as capital. |
format |
text |
author |
NG, Jeffrey Roychowdhury, Sugata |
author_facet |
NG, Jeffrey Roychowdhury, Sugata |
author_sort |
NG, Jeffrey |
title |
Do Loan Loss Reserves Behave like Capital? Evidence from Recent Bank Failures |
title_short |
Do Loan Loss Reserves Behave like Capital? Evidence from Recent Bank Failures |
title_full |
Do Loan Loss Reserves Behave like Capital? Evidence from Recent Bank Failures |
title_fullStr |
Do Loan Loss Reserves Behave like Capital? Evidence from Recent Bank Failures |
title_full_unstemmed |
Do Loan Loss Reserves Behave like Capital? Evidence from Recent Bank Failures |
title_sort |
do loan loss reserves behave like capital? evidence from recent bank failures |
publisher |
Institutional Knowledge at Singapore Management University |
publishDate |
2014 |
url |
https://ink.library.smu.edu.sg/soa_research/1180 https://ink.library.smu.edu.sg/context/soa_research/article/2179/viewcontent/LoanLossReservesBehaveCapital_2014_pp.pdf |
_version_ |
1770571787230248960 |