Do Malaysian banks manage earnings through loan loss provisions? / Abd. Ghafar Ismail, Roselee Shah Shaharudin and Ananda R. Samudhram

Ismail, Abd. Ghafar and Shaharudin, Roselee Shah and R. Samudhram, Ananda (2005) Do Malaysian banks manage earnings through loan loss provisions? / Abd. Ghafar Ismail, Roselee Shah Shaharudin and Ananda R. Samudhram. National Accounting Research Journal, 3 (1). pp. 41-47. ISSN 1675-753X


The 1988 Basle regulations are meant to synchronise banking regulations worldwide and add to the stability of the global banking system. Basle II, due to be released in 2006, addresses some of the flaws in the 1988 accord.
However, both versions do not close a loophole for managing earnings through discretionary adjustments of the loan loss provisions. Some researchers have found indications of income smoothing through loan loss provisions in banks,
but others have concluded otherwise. All of these studies were conducted on banks outside of Malaysia. This study looks specifically at Malaysian banks, and uses a model based on bank-specific and macroeconomic factors that are
peculiar to Malaysia. It concludes that Malaysian banks do not smoothen income. The likely reason is that good governance in Malaysian banks is driven more by regulatory measures imposed by the authorities than stock market discipline. Thus bankers do not seem to be concerned with managing earnings to present a rosy picture to investors. However, from a macroeconomic perspective, stacking up loan loss provisions during good times will help to release more
credit during downturns in economic cycles, helping to soften the impact of recessions. Further research on whether Malaysian banks conduct capital management, to meet regulatory capital requirements, will help to shed more
light on the behaviour of Malaysian banks.


Item Type: Article
Email / ID Num.
Ismail, Abd. Ghafar
Shaharudin, Roselee Shah
R. Samudhram, Ananda
Subjects: H Social Sciences > HG Finance > Banking > Bank loans. Bank credit. Commercial loans
H Social Sciences > HG Finance > Banking > Malaysia
Divisions: Universiti Teknologi MARA, Shah Alam > Faculty of Accountancy
Journal or Publication Title: National Accounting Research Journal
ISSN: 1675-753X
Volume: 3
Number: 1
Page Range: pp. 41-47
Keywords: Earning management, Loan loss provision, Income smoothing, Bank capital
Date: 2005
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