Working Paper

The Impact of Reserves Practices on Bank Opacity

Abstract: Using a banking firm?s unexpected loan loss provision to proxy for earnings management, it is found to have a significantly positive effect on bank opacity. The explanatory power of earnings management on bank opacity is stronger during the pre-crisis period than during the 2007-2009 financial crisis. When we examine the effects of delays in loan loss recognition on bank opacity, we found strong statistical relations during the financial crisis period, while the results for the pre-crisis period are mixed. We conclude that bank opacity is related to unexpected loan loss provision as well as delays in loan loss recognition.

Keywords: Bank opacity; loan loss reserve; delays in loss recognition;

JEL Classification: G21; G30; G34;

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Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2014-07-01

Number: 2013-35

Pages: 33 pages