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Business & Economics

Earnings Management in European Banks: the Financial Crisis and Increased Incentives for Manipulation Through Loan Loss Provisions
Gintautas Garsva, Sigitas Skuodas, Kristina Rudzioniene

ABSTRACT. This study examines earnings management behaviour in the banking industry achieved via manipulation of loan loss provisions, using a sample of 469 commercial banks from 27 EU countries. In particular, using a regression analysis, banks are tested for income smoothing and regulatory capital management under the conditions of economic distress, the sample period being 2005-2010. The analysis finds strong support for the hypotheses that loan loss provisions have been used for both income smoothing and regulatory capital management. Additionally, it finds that some non-discretionary components of loan loss provisions have been irrelevant during the years of the global financial crisis. Finally, it decomposes the EU sample country-wise as well as into different regions and reports findings on income smoothing and regulatory capital management in each of those.

KEYWORDS: earnings management, capital management, loan loss provisions, banks, economic distress, EU.

JEL classification: C82, G21, H12, M41, O52.