In the aftermath of the financial crisis of 2008, the European Council has adopted a number of measures aimed at creating a secure and solid financial sector in the European internal market. These measures have contributed to a unique and harmonizing discipline (Single Rulebook) applicable to all financial institutions in the European Single Market to eliminate legislative differences among member states. The Single Rulebook, which came into force in January 2014, is a transposition of Basel III and is based on the new capital requirements established by Directive 2013/36/EU (the Capital Requirements Directives) and Regulation (EU) 575/2013 (the Capital Requirements Regulation). This prudential discipline requires much more minimum capital, ensures better protection for depositors, and regulates the prevention and management of bank failures to achieve a more resilient, transparent, and efficient banking sector. Indeed, the Single Rulebook has regulated the introduction of the Single Supervisory Mechanism, which consists in the creation of a single European institution of banking supervision. A central question for standards setters, regulators, and academics is whether new banking reforms are able to limit managers’ discretion and make financial reporting more useful for investors. The regulatory system influences the earnings quality of banks, so the purpose of this research is to investigate the relation between the new mandatory disclosure and earnings management, capital management, and signaling theory in the banking sector realized through loan loss provisions (LLPs), the component of income statements most subject to manipulations. In particular, we examine the use of LLPs to manage earnings and capital and to signal future earnings strategies prior to and after the introduction of this single set of harmonized prudential rules. To test our hypotheses, we selected a sample of banks listed on European stock exchange markets in the periods immediately prior to (2010–2011-2012–2013) and after (2014–2015-2016–2017) the effective date of the Single Rulebook. We conducted a two-stage analysis and a single regression model to estimate, first, a non-discretionary component of loan loss provisions and, second, the discretionary component of loans loss provisions that is under bank managers’ control. According to our expectations, the results confirm our hypotheses, suggesting that the “prudential discipline” for financial institutions (the Single Rulebook) discourages earnings manipulation by reducing earnings management, in the form of income smoothing and capital management incentives. Furthermore, LLPs are useful mechanisms for managers to communicate much more information, and they reduce information asymmetry between managers and investors. The results are important to the regulatory institutions (such as the European Union and the European Central Bank), supporting the more stringent discipline introduced by Basel III that ensures faithful representation in financial reporting and discourages insiders from carrying out earnings management to gain private benefits.

Le loan loss provisions nel processo di armonizzazione europea della regolamentazione bancaria

Giuseppe Di Martino;Grazia Dicuonzo
;
Graziana Galeone;Vittorio dell'Atti
2020

Abstract

In the aftermath of the financial crisis of 2008, the European Council has adopted a number of measures aimed at creating a secure and solid financial sector in the European internal market. These measures have contributed to a unique and harmonizing discipline (Single Rulebook) applicable to all financial institutions in the European Single Market to eliminate legislative differences among member states. The Single Rulebook, which came into force in January 2014, is a transposition of Basel III and is based on the new capital requirements established by Directive 2013/36/EU (the Capital Requirements Directives) and Regulation (EU) 575/2013 (the Capital Requirements Regulation). This prudential discipline requires much more minimum capital, ensures better protection for depositors, and regulates the prevention and management of bank failures to achieve a more resilient, transparent, and efficient banking sector. Indeed, the Single Rulebook has regulated the introduction of the Single Supervisory Mechanism, which consists in the creation of a single European institution of banking supervision. A central question for standards setters, regulators, and academics is whether new banking reforms are able to limit managers’ discretion and make financial reporting more useful for investors. The regulatory system influences the earnings quality of banks, so the purpose of this research is to investigate the relation between the new mandatory disclosure and earnings management, capital management, and signaling theory in the banking sector realized through loan loss provisions (LLPs), the component of income statements most subject to manipulations. In particular, we examine the use of LLPs to manage earnings and capital and to signal future earnings strategies prior to and after the introduction of this single set of harmonized prudential rules. To test our hypotheses, we selected a sample of banks listed on European stock exchange markets in the periods immediately prior to (2010–2011-2012–2013) and after (2014–2015-2016–2017) the effective date of the Single Rulebook. We conducted a two-stage analysis and a single regression model to estimate, first, a non-discretionary component of loan loss provisions and, second, the discretionary component of loans loss provisions that is under bank managers’ control. According to our expectations, the results confirm our hypotheses, suggesting that the “prudential discipline” for financial institutions (the Single Rulebook) discourages earnings manipulation by reducing earnings management, in the form of income smoothing and capital management incentives. Furthermore, LLPs are useful mechanisms for managers to communicate much more information, and they reduce information asymmetry between managers and investors. The results are important to the regulatory institutions (such as the European Union and the European Central Bank), supporting the more stringent discipline introduced by Basel III that ensures faithful representation in financial reporting and discourages insiders from carrying out earnings management to gain private benefits.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11586/262333
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