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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 …
Loan Loss Reserves, Regulatory Capital, And Bank Failures: Evidence From The Recent Economic Crisis, Tee Yong Jeffrey Ng, Sugata Roychowdhury
Loan Loss Reserves, Regulatory Capital, And Bank Failures: Evidence From The Recent Economic Crisis, Tee Yong 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 …