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Journal of Banking & Finance Vol. 70 2016

Does Basel II affect the market valuation of discretionary loan loss provisions?

Malika Hamadi1; Andréas Heinen2,3; Stefan Linder2,4; Vlad-Andrei Porumb5

1 University of Leicester · 2 CY Cergy Paris Université · 3 Théorie Économique, Modélisation et Applications · 4 École Supérieure des Sciences Économiques et Commerciales · 5 University of Groningen

open access

Abstract

We use a sample of banks from 24 European countries to investigate whether the adoption of the Basel II Capital Accord in 2008 affects the market valuation of discretionary loan loss provisions (DLLPs). Although Basel II lowers the incentives of internal ratings-based (IRB) banks to recognize income-increasing DLLPs in an opportunistic manner, it has no such impact on the remaining banks, which adopt the Standardized methodology. We use this setup in a difference-in-difference (DiD) design, where Standardized banks act as a control group. Our evidence supports the three hypotheses that, for IRB relative to Standardized banks, Basel II is associated with (i) less income-increasing DLLPs and (ii) less income-smoothing via DLLPs, which enhances the informational content of DLLPs about future loan losses and leads to (iii) higher market valuation of DLLPs. Our findings are timely and have policy implications for future regulatory developments in the banking industry.

DOI
10.1016/j.jbankfin.2016.06.002
Volume
70
Pages
177-192
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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