EARNINGS MANAGEMENT IN EUROPEAN BANKS: THE FINANCIAL CRISIS AND INCREASED INCENTIVES FOR MANIPULATION THROUGH LOAN LOSS PROVISIONS

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.