Accounting, Regulation, and Governance in Financial Institutions

To the extent that financial institutions have a crucial role in the development and stability of the economy, poor performance of banks affects the financial fragility of the whole economy. In turn, accounting and regulatory bodies propose an array of regulations to shape banks' operations and risk. This book investigates financial accounting, regulation and governance issues in banks. It comprises three studies that cover these issues. In the first study, there is strong evidence of regulatory capital management and income smoothing behavior using loan loss provisions in US bank holding companies. The procyclicality inherent in loan loss provisions tends to accentuate regulatory capital management during economic downturns. In the second study, The results reveal that the association between the regulatory capital ratio and bank distress becomes significant if the bank holding company has a capital ratio of less than 6 percent, below which U.S. bank regulators do not regard banks as being well capitalized. In the third study, concentrated shareholders discourage banks from investing in risky positions with respect to total assets, loans and off-balance-sheet items.