Loan Loss Provision, Securities Gains And Losses, And Income Smoothing In Bank Industry

Theoretically speaking, the characteristics of high leverage and risk will lead to the volatile fluctuation of earnings in banks. To ensure stable performance and cover up the exposure of risk, and also deal with regulation, commercial banks have strong motivation to smooth earnings, which affect the quality of accounting information. Loan loss provision is the native tool for income-smoothing. Accounting standard specifies the method of accrual, and before 2006, Five Classification Method is adopted, after 2006, CAS22 set the rule that the accrual of loan loss provision should be followed by future cash flow method, and also stress the objective evidence of the depreciation. This rule limits income smoothing through loan loss provision to some extent. To improve the quality of accounting information, fair value is widely applied in bank industry from 2009. This study focuses on the new characteristics of income smoothing from 2009. We find managers will use loan loss provision and securities gains and losses to smooth income, and will also trade of these two tools, this phenomenon also exists in public banks. Private banks just use loan loss provision, and there exist positive association between the two tools. Whether the exposure to fair value accounting will influence the extent to which banks use each of these earnings management tools or the correlation of the tools, the study does not give the answer. This study can be regarded of a test of the economic effect of the New Accounting Standards, and can also provide references to the standards setters, regulators and auditors.