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Does Basel II Affect the Market Valuation of Discretionary Loan Loss Provisions?

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journal contribution
posted on 2016-07-07, 09:47 authored by Malika Hamadi, Andréas Heinen, Stefan Linder, Vlad-Andrei Porumb
We use a sample of banks from 24 European countries to investigate whether the adoption of the Basel II Capital Accord in 2008 affects the market valuation of discretionary loan loss provisions (DLLPs). Although Basel II lowers the incentives of internal ratings-based (IRB) banks to recognize income-increasing DLLPs in an opportunistic manner, it has no such impact on the remaining banks, which adopt the Standardized methodology. We use this setup in a difference-in-difference (DiD) design, where Standardized banks act as a control group. Our evidence supports the three hypotheses that, for IRB relative to Standardized banks, Basel II is associated with (i) less income-increasing DLLPs and (ii) less income-smoothing via DLLPs, which enhances the informational content of DLLPs about future loan losses and leads to (iii) higher market valuation of DLLPs. Our findings are timely and have policy implications for future regulatory developments in the banking industry.

History

Citation

Journal of Banking and Finance, 2016, 70, pp. 177-192

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/School of Management

Version

  • AM (Accepted Manuscript)

Published in

Journal of Banking and Finance

Publisher

Elsevier

issn

1872-6372

eissn

1872-6372

Acceptance date

2016-06-03

Copyright date

2016

Available date

2017-12-25

Publisher version

http://www.sciencedirect.com/science/article/pii/S0378426616300917

Notes

Following the embargo period the above license applies.

Language

en

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