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Title: Does Basel II Affect the Market Valuation of Discretionary Loan Loss Provisions?
Authors: Hamadi, Malika
Heinen, Andréas
Linder, Stefan
Porumb, Vlad-Andrei
First Published: 25-Jun-2016
Publisher: Elsevier
Citation: Journal of Banking and Finance, 2016, 70, pp. 177-192
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 Link: 10.1016/j.jbankfin.2016.06.002
ISSN: 1872-6372
eISSN: 1872-6372
Embargo on file until: 25-Dec-2017
Version: Post-print
Status: Peer-reviewed
Type: Journal Article
Rights: Copyright © Elsevier, 2016. This article is distributed under the terms of the Creative Commons Attribution-Non Commercial-No Derivatives License ( ), which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.
Description: Following the embargo period the above license applies.
Appears in Collections:Published Articles, School of Management

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