The Effect of Covid-19 on Loan Loss Provisions and Earnings Management of European Banks

The book explores the impact of Covid-19 on loan loss provisions (LLPs) and earnings management of European banks. It finds that banks in countries with strong containment measures use discretionary LLPs more extensively, overstate them initially, and understate them in 2021. Additionally, banks engage in upward earnings management during Covid-19.

Format: Paperback / softback
Length: 57 pages
Publication date: 13 January 2023
Publisher: Springer-Verlag Berlin and Heidelberg GmbH & Co. KG

This book delves into the profound impact of COVID-19 on loan loss provisions (LLPs) and earnings management practices of European banks. Through meticulous analysis, the author explores how the remarkable flexibility provided by prudential authorities and standard setters in the context of the pandemic influences banks' decision-making when accounting for loan loss provisions. What emerges is a fascinating trend: banks, driven by the unique challenges posed by COVID-19, have resorted to discretionary LLPs to a greater extent than before. This inclination is particularly pronounced in countries that have implemented robust containment measures to combat the pandemic.

Interestingly, while banks initially tend to overstate LLPs at the onset of the pandemic, they gradually underscore these provisions throughout 2021. This shift suggests a nuanced approach as banks navigate the evolving landscape of the pandemic.

Furthermore, the author delves into the direction of earnings management during COVID-19. The findings reveal a notable shift: banks have adopted upward earnings management strategies, as opposed to the downward earnings management practices observed before the pandemic. This change in earnings management tactics reflects the banks' efforts to navigate the uncertain economic conditions and maintain financial stability.

Overall, this book offers valuable insights into the complex interplay between COVID-19, loan loss provisions, and earnings management practices of European banks. It sheds light on the strategies employed by these institutions to adapt to the unprecedented challenges posed by the pandemic, and provides valuable lessons for policymakers and financial industry professionals alike.

Weight: 117g
Dimension: 210 x 148 (mm)
ISBN-13: 9783658400590
Edition number: 1st ed. 2023