Resumen de Do Dynmic Provisions Reduce Income Smoothing Using Loan Loss Provisions?

Daniel Pérez, Vicente Salas Fumás, Jesús Saurina Salas, Philip Molyneux (comp.), Gyongyi Loranth (comp.)

• Spanish banks had to set aside a countercyclical loan loss provision during the period 2000-2004. The amount of such provision as well as the allowance accumulated had to be disclosed by banks. the former creates a natural experiment to test whether banks smooth earning to mislead investors and other interested parties, or, by contrast, income smoothing is used to avoid the existence of market frictions. Using panel data econometric techniques, we find evidence of income smoothing through loan loss provision (1988-1999). However, during 2000-2004, banks relied only on the newly created countercyclical provision to smooth income. This change in behaviour suggests that there may be efficiency gains in reducing the volatility of accounting earnings over time.