The Effect of the Paycheck Protection Program and Financial Reporting Standards on Bank Risk-Taking

This paper examines the consequences of the paycheck protection program (PPP) for bank risk-taking and whether the shift to the current expected credit loss (CECL) model moderates this effect. We find that the extent of a bank’s PPP participation is associated with relatively greater changes in risk-taking outside of the PPP. We also show that this effect is concentrated in banks that have not early adopted the CECL model and banks with timelier pre-PPP loan loss provisions, suggesting that timelier loan loss recognition constrains risk-taking incentives. Overall, our findings provide insight into the indirect consequences of government stimulus programs administered through banks and the role of accounting in constraining bank risk-taking. This paper was accepted by Suraj Srinivasan, accounting.

Empirical Analysis of Non-Performing Loans and Liquidity of Deposit Money Banks: Nigeria Experience

Nigerian Deposit Money Banks (DMBs) tend to have suffered the plight of Non-Performing Loans (NPLs) in recent times in no small quantum. Consequently, a large chunk of them have had to increase their loan loss provisions and this may dwindle their liquidity. This study investigates the effect of non-performing loans on liquidity of Deposit Money Banks (DMBs) in Nigeria. A panel regression analysis was performed on a data of 15 quoted DMBs from 2009 to 2019, in order to examine the correlation between the explained variable (banks’ liquidity) and Non-Performing Loans (NPL) while other explanatory variables- Capital Adequacy Ratio (CAR), Bank Size (BS), Loan Growth (LG), Monetary Policy Rate (MPR), Gross Domestic Product (GDP) and Inflation were taken into consideration. Data were extracted from the banks’ yearly financial statements and the World Bank Financial Statistics. Based on the empirical findings, the study found only four variables-Non Performing Loans, Capital Adequacy Ratio, Bank Size and Inflation significantly related at 5% significant level with banks’ liquidity while the other three; Gross Domestic Product, Loan Growth and Monetary Policy Rate were identified as insignificant. The finding also revealed that NPLs has negative effect on banks’ liquidity while CAR, BS and INF showed positive relationship. The study recommends strict compliance of banks with the NPLs tolerable limit set by the Central bank. It also suggests that the CBN take proactive measure to ensure the banks’ compliance with the minimum capital requirement. Keywords: Banks, Financial Institutions, Liquidity, Non-Performing Loans, Performance

Factors influencing bank profitability in a developing economy- Panel evidence from Bangladesh

The purpose of this paper is to investigate the relationship between bank-specific characteristics and profitability of commercial banks operating in Bangladesh to find the role of both internal and external factors in achieving high profitability. The Fixed Effect Model is built on a balanced panel data set comprising 135 observations of 27 commercial banks over the period 2014-2018. Regression findings reveal that size and capital ratio are significant bank-specific determinants of bank profitability in Bangladesh where the effect of loans ratio is statistically insignificant. Findings also suggest that banks with higher deposits tend to be more profitable and small banks have efficient management. The cost to income ratio and loan loss provisions are statistically insignificant on the performance of banks. On the other hand, macroeconomic variables such as GDP growth have a significant impact on profitability whereas the effects of inflation on profitability are statistically insignificant in some cases.

Factors Influencing Bank Profitability in a Developing Economy

The purpose of this paper is to investigate the bank-specific and macroeconomic determinants of commercial banks profitability operating in Bangladesh to explore the role of both internal and external factors in achieving high profitability. The fixed effect model is built on a balanced panel data set comprising 135 observations of 27 commercial banks over the period 2014-2018. Regression findings reveal that size and capital ratio are significant bank-specific determinants of bank profitability in Bangladesh where the effect of loans ratio is statistically insignificant. Findings also suggest that banks with higher deposits tend to be more profitable, and small banks have efficient management. The cost-to-income ratio and loan loss provisions are statistically insignificant on the performance of banks. On the other hand, macroeconomic variables such as GDP growth have a significant impact on profitability whereas the effects of inflation on profitability are statistically insignificant in some cases.

Three essays on economic consequences of new accounting regulation and bank accounting

This dissertation comprises three distinct chapters. The first chapter examines whether accounting quality improves for firms voluntarily adopting IFRS by using a single country setting of Swiss firms. The Swiss setting enables isolating the effect of the change from accounting standards from changes in reporting enforcement. I find that voluntary adopters exhibit significant improvement in accounting quality metrics in the post-adoption period. Classifying the adopters in non-serious or serious adopters based on their actual reporting changes around the adoption, I find that the non-serious adopters do not face accounting quality improvements in the post-adoption period. Overall, the evidence points towards the explanation that accounting quality is mainly shaped by reporting incentives. The second chapter examines the new Expected Credit Loss (ECL) model’s impact on the predictability of loan loss provisions (LLP) and potential market discipline consequences. I examine whether the arguably less objective LLP under IFRS 9 obscure market participants’ ability to monitor the banks’ risk-taking incentives. The empirical findings suggest a decrease in the association between loan loss provisions and the incurred loss model determinants in the post-IFRS 9 period, i.e., LLP are based less on objective determinants after IFRS adoption. Furthermore, I find a decrease in the sensitivity of leverage to changes in risk in the post-adoption period of IFRS 9, indicating an attenuated market discipline over banks’ risk-taking. In contrast, I find no changes in the determinants of LLP and market discipline for the benchmark sample of U.S. banks, which were not subject to similar accounting changes during the sample period. The third chapter examines whether banks change the accounting designation of derivatives after ASU 2017-12. I investigate the impact of the new standard on earnings volatility within different groups of derivative users. Using detailed quarterly data on financial derivatives for bank holdings, I find that the level of earnings volatility and the ASU 2017-12 influence the banks’ decisions to use hedge accounting. In assessing the impact within groups of derivative users, I find evidence that banks that designate derivatives for hedge accounting purposes exhibit a lower level of earnings volatility around the adoption of ASU 2017-12 as opposed to banks that elect not to apply hedge accounting. I also find that banks that elect to use hedge accounting for the first time after adopting the standard update exhibit decreased earnings volatility. Overall, the findings confirm the FASB’s initial intention of introducing the accounting standard’s update.