Use this URL to cite or link to this record in EThOS: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.659450
Title: Studies on the financial accounting, regulation and governance of banks
Author: El Sood , Heba Abou
Awarding Body: Lancaster University
Current Institution: Lancaster University
Date of Award: 2011
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Abstract:
To the extent that financial institutions have a crucial role in the development and stability of the economy, poor performance of banks affects the financial fragility of the whole economy. In turn, accounting and regulatory bodies propose an array of regulations to shape banks operations and risk. This thesis examines financial accounting, regulation and governance issues in banks. It comprises three studies that cover these issues, In the first study, using a sample of U.S . bank holding companies over the period 2001-2009, I test and find strong evidence of regulatory capital management and income smoothing behavior using loan loss provisions. Bank holding companies accelerate loan loss provisions to smooth income when banks (1) hit the regulatory minimum target, (2) are in non-recessionary periods, and (3) are more profitable. In line with the topical debate on the overhaul of accounting standards for loan loss provisioning, I test and find support for the regulators' claim that the current accounting rules reinforce procyclicality in regulatory capital. The procyclicality inherent in loan loss provisions tends to accentuate regulatory capital management during economic downturns. The second study examines whether regulatory capital ratios are significantly associated with bank distress. It investigates whether the association is affected by the bank's proximity to the minimum required capital ratios. The results reveal that the association between the regulatory capital ratio and bank distress becomes significant if the bank holding company has a capital ratio of less than 6 percent, below which U.S. bank regulators do not regard banks as being well capitalized. During the financial crisis period of 2007-2009, I predict and find an insignificant association when the criterion for banks to To the extent that financial institutions have a crucial role in the development and stability of the economy, poor performance of banks affects the financial fragility of the whole economy. In turn, accounting and regulatory bodies propose an array of regulations to shape banks operations and risk. This thesis examines financial accounting, regulation and governance issues in banks. It comprises three studies that cover these issues, In the first study, using a sample of U.S . bank holding companies over the period 2001-2009, I test and find strong evidence of regulatory capital management and income smoothing behavior using loan loss provisions. Bank holding companies accelerate loan loss provisions to smooth income when banks (1) hit the regulatory minimum target, (2) are in non-recessionary periods, and (3) are more profitable. In line with the topical debate on the overhaul of accounting standards for loan loss provisioning, I test and find support for the regulators' claim that the current accounting rules reinforce procyclicality in regulatory capital. The procyclicality inherent in loan loss provisions tends to accentuate regulatory capital management during economic downturns. The second study examines whether regulatory capital ratios are significantly associated with bank distress. It investigates whether the association is affected by the bank's proximity to the minimum required capital ratios. The results reveal that the association between the regulatory capital ratio and bank distress becomes significant if the bank holding company has a capital ratio of less than 6 percent, below which U.S. bank regulators do not regard banks as being well capitalized. During the financial crisis period of 2007-2009, I predict and find an insignificant association when the criterion for banks toTo the extent that financial institutions have a crucial role in the development and stability of the economy, poor performance of banks affects the financial fragility of the whole' economy. In turn, accounting and regulatory bodies propose an array of regulations to shape banks ' operations and risk. This thesis examines financial accounting, regulation and governance issues in banks. It comprises three studies that cover these issues, In the first study, using a sample of U.S . bank holding companies over the period 2001-2009, I test and find strong evidence of regulatory capital management and income smoothing behavior using loan loss provisions. Bank holding companies accelerate loan loss provisions to smooth income when banks (1) hit the regulatory minimum target, (2) are in non-recessionary periods, and (3) are more profitable. In line with the topical debate on the overhaul of accounting standards for loan loss provisioning, I test and find support for the regulators' claim that the current accounting rules reinforce procyclicality in regulatory capital. The procyclicality inherent in loan loss provisions tends to accentuate regulatory capital management during economic downturns. The second study examines whether regulatory capital ratios are significantly associated with bank distress. It investigates whether the association is affected by the bank's proximity to the minimum required capital ratios. The results reveal that the association between the regulatory capital ratio and bank distress becomes significant if the bank holding company has a capital ratio of less than 6 percent, below which U.S. bank regulators do not regard banks as being well capitalized. During the financial crisis period of 2007-2009, I predict and find an insignificant association when the criterion for banks to be classified as well capitalized is set to its current threshold of 6 percent. The significance increases when I set the criterion to the higher levels of 8 percent, 10 percent and 12 percent respectively. Finally, the association is significantly enhanced when simultaneously including regulatory requirements with respect to both the leverage ratio and the tier I capital ratio. The third study investigates the influence of ownership structure of U.S. bank holding companies on risk-taking behavior during the period 2002-2009. More specifically, I test and find that concentrated shareholders discourage banks from investing in risky position: with respect to total assets, loans and off-balance-sheet items. Regarding the effect of the regulatory capital adequacy on the association between ownership concentration and bank risk taking, I find that the larger the regulatory capital, the less negative is the association between ownership concentration and risk taking in banks. Additionally, I find that this effect is more pronounced for well-capitalized bank holding companies than for poorly capitalized bank holding companies. Finally, T examine whether this effect differs significantly between the crisis period of 2007-2009 and the pre-crisis boom of 2002-2006. Results show that the effect of regulatory capital adequacy on the association between ownership concentration and risk taking is less pronounced for bank holding companies during a period of financial crisis relative to a pre-crisis boom period. Key Words: loan loss provisions, regulatory capital management, income smoothing, procyclicality, distress, default probability, financial crisis, ownership concentration, risk taking, bank holding company
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID: uk.bl.ethos.659450  DOI: Not available
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