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The Politics Of Bank Opacity, Heng Yue, Liandong Zhang, Qinlin Zhong
The Politics Of Bank Opacity, Heng Yue, Liandong Zhang, Qinlin Zhong
Research Collection School Of Accountancy
The distribution of power in the political system shapes the financial reporting opacity of banks. Specifically, banks located in states with senators on the Senate Banking Committee (BC senators) have greater abnormal loan loss provisions than banks in other states. The result is stronger for larger banks and banks with higher risk. In addition, BC senators have a negative effect on the likelihood of banks in their home states receiving enforcement actions, and, more importantly, this effect is stronger for more opaque banks. These findings suggest that politicians, regulators, and banks use opaque financial reporting to facilitate regulatory forbearance. Moreover, …
Do Loan Loss Reserves Behave Like Capital? Evidence From Recent Bank Failures, Jeffrey Ng, Sugata Roychowdhury
Do Loan Loss Reserves Behave Like Capital? Evidence From Recent Bank Failures, Jeffrey Ng, Sugata Roychowdhury
Research Collection School Of Accountancy
Regulatory capital guidelines allow for loan loss reserves to be added back as capital. The evidence in this paper suggests that the influence of loan loss reserves added back as regulatory capital (hereafter referred to as “add-backs”) on bank risk cannot be explained by either economic principles underlying the notion of capital, or accounting principles underlying the recording of reserves. Specifically, we observe that in sharp contrast to the economic notion of capital as a buffer against bank failure risk, add-backs are positively associated with the risk of bank failure during the recent economic crisis. Further the positive association of …