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Accounting Quality in Banking: The Role of Regulatory Interventions

Manthos D. Delis, Iftekhar Hasan, Maria Iosifidi, Lingxiang Li

Journal of Banking and Finance, 2018

Abstract

Using the full sample of U.S. banks and hand-collected data on enforcement actions over 2000–2014, we analyze the role of these interventions in promoting several aspects of accounting quality. We find that enforcement actions issued for both risk-related and accounting-related reasons lead to significant improvements in accounting quality. This improvement is consistently found for earnings smoothing, big-bath accounting, timely recognition of future loan losses, the association of loan loss provisions with future loan charge offs, loss avoidance, and cash flow predictability and earnings persistence. Most of the effects are somewhat more potent in the crisis period and survive in several sensitivity tests. Our findings highlight the imperative role of regulatory interventions in promoting bank accounting quality.

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Bank Risk Proxies and the Crisis of 2007/09: A Comparison

Felix Noth, Lena Tonzer

IWH Discussion Papers, No. 13, 2015
published in: Applied Economics Letters

Abstract

Motivated by the variety of bank risk proxies, our analysis reveals that nonperforming assets are a well-suited complement to the Z-score in studies of bank risk. We investigate four proxies for bank risk that are frequently used in the literature. Our analysis shows that non-performing assets are a good proxy for bank risk for two reasons. First, non-performing assets nest the alternative proxies as shown by the high share of variation in non-performing assets explained by the Z-score, loan loss reserves and loan loss provisions. Second, non-performing assets are well-suited to explain bank failures one year ahead. The latter point also holds for the Z-score whereby the information content of the Z-score seems to differ from the other variables. We conclude that non-performing assets are a well-suited complement to the Z-score, which may come with calculation issues regarding the volatility of profitability, in studies of bank risk.

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