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Loan-loss provisions, earnings management, and capital management by Russian banks: the impact of changes in banking regulation and oversight

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Abstract

This paper compares earnings management (EM) and capital management (CM) by Russian banks before and after changes in banking regulation and oversight in Russia. In Russia, in recent years, the Central Bank of the Russian Federation has imposed new regulations on banks. In addition, the Central Bank has strengthened its oversight by revoking the license of a large number of banks. Hence, we compare EM and CM before and after these changes in regulation and oversight. We focus on the use of loan-loss provisions (LLPs) for EM and CM. We have three main results. First, we find that banks use LLPs for EM both before and after these changes in regulation and oversight. However, banks’ use of LLPs for EM is similar pre- and post-changes. Second, for the entire sample period, we find mixed evidence of the relationship between capital and LLPs. However, post-changes, the relationship between capital and LLPs is more negative relative to pre-changes. This result is consistent with stronger oversight by regulators post-changes. Third, the difference in CM post-changes relative to pre-changes is different for government-owned banks than for private banks.

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Notes

  1. According to International Monetary Fund (IMF 2011), the Russian banking sector was characterized as being resilient to many threats. The system-wide capital adequacy ratio was above 14%.

  2. With bank-level fixed effects, our model focuses only on within-bank variation in our variables. During the sample period, no banks switched from government-owned to private or private to government-owned. Hence, the variable GOV has no within-bank variation. As a result, no results can be generated for GOV. However, our main tests relate to the interaction terms GOV is involved in (e.g., Capital × Post × GOV), not to GOV itself.

  3. In the regressions with interaction terms coefficients on constituent terms are of conditional nature, hence they might have little inferential value (Burks et al. 2019).

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Authors and Affiliations

  1. Graduate School of Management, St. Petersburg University, 199004, Volkhovskiy Per., 3, St. Petersburg, Russia

    Egor Nikulin

  2. National Research University Higher School of Economics (Saint Petersburg), Saint Petersburg, Russia

    Jeff Downing

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  1. Egor Nikulin
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  2. Jeff Downing
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Correspondence to Jeff Downing.

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Nikulin, E., Downing, J. Loan-loss provisions, earnings management, and capital management by Russian banks: the impact of changes in banking regulation and oversight. Eurasian Bus Rev 11, 659–677 (2021). https://doi.org/10.1007/s40821-020-00163-9

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