(This abstract was borrowed from another version of this item.)"> (This abstract was borrowed from another version of this item.)">
[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/eee/jappol/v24y2005i2p81-100.html
   My bibliography  Save this article

How should banks account for loan losses

Author

Listed:
  • Benston, George J.
  • Wall, Larry D.
Abstract
The agencies that regulate banks are involved in an ongoing debate about the appropriate way for banks and other lenders to account for default risk on loans. Accounting authorities are concerned with whether the accounting method meets the needs of general-purpose users of financial statements, particularly investors. In contrast, bank supervisors are concerned about banks being inadequately capitalized and possibly failing. ; To shed light on this debate, this article reviews the generally accepted accounting principles (GAAP) currently used, which are based on historic-cost values for assets and liabilities. It then analyzes economic-value, or fair-value, accounting, which is being discussed as a substitute. ; The analysis suggests that the reported GAAP value is likely to understate the economic value of most banks? portfolios most of the time. The economic values of loans would be more valuable if they were reliable. However, the authors argue, the fair value of credit losses must be estimated by management and hence may be biased by managerial attempts to attain earnings and capital targets. ; The authors conclude that using the lower of historic cost or economic value for valuing the credit risk of loans would provide the most relevant adequately reliable measure of loan value and would thus be the most appropriate procedure.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Benston, George J. & Wall, Larry D., 2005. "How should banks account for loan losses," Journal of Accounting and Public Policy, Elsevier, vol. 24(2), pages 81-100.
    • Handle: RePEc:eee:jappol:v:24:y:2005:i:2:p:81-100
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0278-4254(04)00096-1
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Daniel Pérez & Vicente Salas-Fumás & Jesús Saurina, 2011. "Do dynamic provisions reduce income smoothing using loan Loss provisions?," Working Papers 1118, Banco de España.
    2. Daniel Perez & Vicente Salas-Fumas & Jesus Saurina, 2008. "Earnings and Capital Management in Alternative Loan Loss Provision Regulatory Regimes," European Accounting Review, Taylor & Francis Journals, vol. 17(3), pages 423-445.
    3. Eliana Balla & Andrew McKenna, 2009. "Dynamic provisioning: a countercyclical tool for loan loss reserves," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 95(Fall), pages 383-418.
    4. Schoenmaker, Dirk & Reinders, Henk Jan & Van Dijk, Mathijs, 2020. "Is COVID-19 a threat to financial stability in Europe?," CEPR Discussion Papers 14922, C.E.P.R. Discussion Papers.
    5. Ozili, Peterson K & Outa, Erick R, 2018. "Bank Earnings Smoothing During Mandatory IFRS adoption in Nigeria," MPRA Paper 89690, University Library of Munich, Germany.
    6. Lepetit, Laetitia & Strobel, Frank & Dickinson, David G., 2012. "Does uncertainty matter for loan charge-offs?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 264-277.
    7. Aparicio, Juan & Duran, Miguel A. & Lozano-Vivas, Ana & Pastor, Jesus T., 2018. "Are charter value and supervision aligned? A segmentation analysis," Journal of Financial Stability, Elsevier, vol. 37(C), pages 60-73.
    8. Gebhardt, Günther & Novotny-Farkas, Zoltán, 2018. "Comparability and predictive ability of loan loss allowances: The role of accounting regulation versus bank supervision," CFS Working Paper Series 591, Center for Financial Studies (CFS).
    9. García Osma, Beatriz & Mora, Araceli & Porcuna-Enguix, Luis, 2019. "Prudential supervisors’ independence and income smoothing in European banks," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 156-176.
    10. Stefan Hlawatsch & Sebastian Ostrowski, 2009. "Economic Loan Loss Provision and Expected Loss," FEMM Working Papers 09013, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    11. Ronald Zhao & Yihong He, 2014. "The accounting implication of banking deregulation: an event study of Gramm-Leach-Bliley Act (1999)," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 449-468, April.
    12. Balla, Eliana & Rose, Morgan J., 2015. "Loan loss provisions, accounting constraints, and bank ownership structure," Journal of Economics and Business, Elsevier, vol. 78(C), pages 92-117.
    13. Tito Tomas Siueia & Jianling Wang, 2017. "Loan Loss Provisions, Income Smooth, Signaling, Capital Management and Pro-Cyclicality: Empirical Evidence from Mozambique¡¯s Commercial Banks," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(11), pages 48-63, November.
    14. Ovidiu VOICU, 2016. "Ifrs 9 Approach Within The „Regulatory-Accounting” Mix," ECONOMY AND SOCIOLOGY: Theoretical and Scientifical Journal, Socionet;Complexul Editorial "INCE", issue 4, pages 71-78.
    15. Hopp, Janina & Nippel, Peter, 2015. "Periodenerfolgsmessung und Risikovorsorge im Kreditgeschäft: Ein grundlegender Überblick und Vergleich alternativer Ansätze der Bewertung von Kreditforderungen," Manuskripte aus den Instituten für Betriebswirtschaftslehre der Universität Kiel 662, Christian-Albrechts-Universität zu Kiel, Institut für Betriebswirtschaftslehre.
    16. Lakshmi Balasubramanyan & James B. Thomson & Saeed Zaman, 2017. "Evidence of Forward-Looking Loan Loss Provisioning with Credit Market Information," Journal of Financial Services Research, Springer;Western Finance Association, vol. 52(3), pages 191-223, December.
    17. Eliana Balla & Morgan J. Rose, 2011. "Loan loss reserves, accounting constraints, and bank ownership structure," Working Paper 11-09, Federal Reserve Bank of Richmond.
    18. Noor Hashim & Weijia Li & John O'Hanlon, 2019. "Reflections on the development of the FASB’s and IASB’s expected-loss methods of accounting for credit losses," Accounting and Business Research, Taylor & Francis Journals, vol. 49(6), pages 682-725, September.
    19. Adela Socol, 2011. "Loan Losses Provisioning Processes In Romanian Banks During January 2007 - February 2011," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(13), pages 1-11.
    20. Loveland, Robert, 2016. "How prompt was regulatory corrective action during the financial crisis?," Journal of Financial Stability, Elsevier, vol. 25(C), pages 16-36.
    21. MITOI Elena & ACHIM Luminita & DESPA Madalin & TURLEA Codrut, 2020. "Ifrs 9 And The Interaction With Basel Iii Regulation Pillars," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 213-222, December.
    22. Zoltán Novotny-Farkas, 2016. "The Interaction of the IFRS 9 Expected Loss Approach with Supervisory Rules and Implications for Financial Stability," Accounting in Europe, Taylor & Francis Journals, vol. 13(2), pages 197-227, May.
    23. Di Fabio, Costanza & Ramassa, Paola & Quagli, Alberto, 2021. "Income smoothing in European banks: The contrasting effects of monitoring mechanisms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 43(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jappol:v:24:y:2005:i:2:p:81-100. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jaccpubpol .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.