A methodology for calculating the allowance for loan losses in commercial banks

Abacus

Volumn 40, Issue 3, 2004, Pages 321-341

  Gray, Robert P ^a   Clarke, Frank L ^b  

^a UNIVERSITY OF SYDNEY   (Australia)

^b UNIVERSITY OF NEWCASTLE   (Australia)

Author keywords

Accounting; Allowance; Banks; Earnings management; Provision

Indexed keywords

EID: 33645069790     PISSN: 00013072     EISSN: 14676281     Source Type: Journal    
DOI: 10.1111/j.1467-6281.2004.00161.x     Document Type: Article

References (63)

1. Accounting Standards Executive Committee, Exposure Draft, Proposed Statement of Position, Allowance for Credit Losses, AICPA, February 2002.
2. Ahmed, A. S., C. Takeda and S. Thomas, ‘Bank Loan Loss Provisions: A Re-Examination of Capital Management, Earnings Management and Signaling Effects’, Journal of Accounting and Economics, November 1999.
3. Altman, E. I., ‘Valuation, Loss Reserves, and Pricing of Commercial Loans’, Journal of Commercial Lending, August 1993.
4. Altman, E. I., and A. Saunders, ‘Credit Risk Measurement: Developments Over the Last 20 Years’, Journal of Banking and Finance, December 1997.
5. Austin, D. G., ‘Use Migration Analysis to Refine Estimates of Future Loan Losses’, Commercial Lending Review, Spring 1992.
6. Australian Accounting Standards Board, AASB 1032, Specific Disclosures by Financial Institutions, AASB, December 1996.
7. Australian Prudential Regulatory Authority, Guidance Note: AGN 220.3—Prescribed Provisioning, APRA, November 2002.
8. Bank Act [of Canada], 1991, c. 46, updated August 2002.
9. Bank of Canada, Financial System Review, December 2002.
10. Bank of England, Interim Prudential Sourcebook: Banks, June 2001.
11. Bank of Japan, Utilization of Financial Institutions’ Self-Assessment in Enhancing Credit Risk Management, February 1998.
12. Barth, M. E., J. A. Elliott and M. W. Finn, ‘Market Rewards Associated With Patterns of Increased Earnings’, Journal of Accounting Research, Autumn 1999.
13. Basel Committee on Banking Supervision, Sound Practices for Loan Accounting, Credit Risk Disclosure and Related Matters, October 1998.
14. Basel Committee on Banking Supervision, Principles for the Management of Credit Risk, September 2000a.
15. Basel Committee on Banking Supervision, Best Practices for Credit Disclosure, September 2000b.
16. Basel Committee on Banking Supervision, Consultative Document—Overview of the New Basel Capital Accord, April 2003.
17. Beatty, A., B. Ke and K. Petroni, ‘Earnings Management to Avoid Earnings Declines Across Publicly and Privately Held Banks’, The Accounting Review, July 2002.
18. Bhat, V. N., ‘Banks and Income Smoothing: An Empirical Analysis’, Applied Financial Economics, December 1996.
19. Borio, C., F. Furfine and P. Lowe, ‘Procyclicality of the Financial System and Financial Stability: Issues and Policy Options’, BIS Papers, No. 1, 2001.
20. Burgstahler, D., and I. Dichev, ‘Earnings Management to Avoid Earnings Decreases and Losses’, Journal of Accounting and Economics, December 1997.
21. Chevalier, J. A., and D. S. Scharfstein, ‘Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence’, American Economic Review, September 1996.
22. Cockburn, D. J., ‘GAAP vs. AADBA’, CA Magazine, January 1992.
23. Comptroller of the Currency, Comptroller's Handbook: Allowance for Loan and Lease Losses, 1996.
24. DeAngelo, H., L. DeAngelo and D. J. Skinner, ‘Reversal of Fortune: Dividend Signaling and the Disappearance of Sustained Earnings Growth’, Journal of Financial Economics, March 1996.
25. Degeorge, F., J. Patel and R. Zeckhauser, ‘Earnings Management to Exceed Thresholds’, Journal of Business, January 1999.
26. Federal Deposit Insurance Corporation, Annual Report 2003, FDIC, 2004.
27. Federal Deposit Insurance Corporation, Annual Report 1999, FDIC, 2000.
28. Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), Public Law 102–242, 19 December 1991.
29. Federal Financial Institutions Examination Council, ‘Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions’, Federal Register, 6 July 2001.
30. Financial Accounting Standards Board, SFAS 5, Accounting for Contingencies, FASB, 1975.
31. Financial Accounting Standards Board, SFAC 2, Qualitative Characteristics of Accounting Information, FASB, 1980.
32. Financial Accounting Standards Board, SFAS 114, Accounting by Creditors for Impairment of a Loan, FASB, 1993.
33. Financial Accounting Standards Board, Board Minutes, 9 January 2003.
34. Gray, R. P., ‘Research Note: Revisiting Fair Value Accounting—Measuring Commercial Banks’ Liabilities’, Abacus, June 2003.
35. Green, E., and M. A. Moss, A Business of National Importance: The Royal Mail Shipping Group, 1902–1937, Methuen, 1982.
36. Healy, P. M., and J. M. Wahlen, ‘A Review of the Earnings Management Literature and its Implications for Standard Setting’, Accounting Horizons, December 1999.
37. Hoggarth, G., and D. Pain, ‘Bank Provisioning: The U.K. Experience’, Financial Stability Review, June 2002.
38. International Accounting Standards Board, Framework: Framework for the Preparation and Presentation of Financial Statements, IASB, 2001.
39. International Accounting Standards Board, Projects in Progress, IASB, 2003.
40. International Accounting Standards Committee, IAS 30, Disclosure in the Financial Statements of Banks and Similar Financial Institutions, IASC, 1990.
41. International Accounting Standards Committee, IAS 36, Impairment of Assets, IASC, 1998.
42. International Accounting Standards Committee, IAS 39, Impairment of Assets: Financial Instruments: Recognition and Measurement, IASC, 1998.
43. Kane, E. J., ‘De Jure Interstate Banking: Why Only Now?’ Journal of Money, Credit, and Banking, May 1996.
44. Kane, E. J., The S & L Insurance Mess: How Did it Happen? The Urban Institute Press, 1989.
45. Katz, E. M., ‘New Developments on Loan-Loss Reserves: An Update’, Bank Accounting and Finance, Winter 19992000.
46. Kim, D., and A. M. Santomero, ‘Forecasting Required Loan Loss Reserves’, Journal of Economics and Business, February 1993.
47. Koch, T. W., and L. D. Wall, The Use of Accruals to Manage Reported Earnings: Theory and Evidence, Working Paper Series, Federal Reserve Bank of Atlanta, 2000.
48. Levitt, A., ‘The “Numbers Game”’, SEC, 28 September 1998.
49. Lucas, A., P. Klaassen, P. Spreij and S. Straetmans, ‘An Analytic Approach to Credit Risk of Large Corporate Bond and Loan Portfolios’, Journal of Banking and Finance, September 2001.
50. Ma, C. K., ‘Loan Loss Reserves and Income Smoothing: The Experience in the U.S. Banking Industry’, Journal of Business Finance and Accounting, Winter 1988.
51. McNichols, M., and G. P. Wilson, ‘Evidence of Earnings Management From the Provision for Bad Debts’, Journal of Accounting Research, Supplement, 1988.
52. National Australia Bank, 1998 Annual Report, NAB, 1998.
53. Nazareth, A. L., ‘Testimony Concerning Transparent Financial Reporting for Structured Finance Transactions Before the Senate Permanent Subcommittee on Investigations, Committee on Governmental Affairs’, 11 December 2002.
54. Roukema, M., ‘Roukema Statement on Loan Loss Reserves’, press release, 16 June 1999.
55. Saunders, A., Financial Institutions Management, 3rd ed., McGraw-Hill, 2000.
56. Scheiner, J. H., ‘Income Smoothing: An Analysis in the Banking Industry’, Journal of Bank Research, Summer 1981.
57. Securities and Exchange Commission, Staff Accounting Bulletin: No. 102—Selected Loan Loss Allowance Methodology and Documentation Issues, SEC, 2001.
58. Spillenkothen, R., ‘Recent Developments Regarding Loan Loss Allowances. Letter to: The Officer in Charge of Supervision and Appropriate Supervisory and Examination Staff at Each Federal Reserve Bank and to Domestic Banking Organization Supervised by the Federal Reserve’, May 1999.
59. Sutton, M. H., ‘Current Developments in Financial Reporting: Perspectives From the SEC. Speech Made at the American Institute of Certified Public Accountants. National Conference on Banks and Savings Institutions’, 7 November 1997.
60. Wahlen, J. M., ‘The Nature of Information in Commercial Bank Loan Losses Disclosures’, The Accounting Review, July 1994.
61. Wall, L. D., and T. W. Koch., ‘Bank Loan-Loss Accounting: A Review of Theoretical and Empirical Evidence’, Federal Reserve Bank of Atlanta Economic Review, Second Quarter, 2000.
62. Wallison, P. J., ‘Five Principles for Dealing with Nonperforming Loans’, American Enterprise Institute for Public Policy Research, 25 September 2001.
63. Westpac Banking Corporation, 1994 Annual Report, Westpac Banking Corporation, 1994.