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Bank Income Smoothing During the COVID-19 Pandemic: Evidence from UK Banks

In: The New Digital Era: Other Emerging Risks and Opportunities

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  • Peterson K. Ozili

Abstract

Purpose: In this chapter, the author evaluates the association between bank loan loss provisions (LLP) and the pre-provisions earnings of UK banks during the first-wave of the COVID-19 pandemic. A positive co-movement between the two variables indicates income smoothing. Methodology: Graphical analysis, correlation analysis and regression analysis are used to assess the relationship between income smoothing and bank provisions among UK systemic banks. Findings: The findings show that LLP have an inverted V-shaped property during the first-wave of COVID-19 pandemic. LLP reached its highest level at the peak of the pandemic in Q2 2020 and declined in the subsequent quarters. The regression results show that LLP are positively related to pre-provisions earnings during the pandemic quarters and in the pre-pandemic quarters. The relationship is stronger in the pandemic quarters and indicates higher income smoothing in the pandemic quarters. The correlation results also show a strong positive correlation between bank provisions and pre-provisions earnings in the pandemic period. In the individual bank analysis, three of the four systemic banks exhibit higher income smoothing during the pandemic quarters. Implication: UK systemic banks engaged in earnings management as a coping mechanism to mitigate the effect of the pandemic on their profits. Need for the study/originality: This chapter is the first to provide a preliminary analysis of income smoothing among banks during the early stages of the COVID-19 pandemic.

Suggested Citation

  • Peterson K. Ozili, 2022. "Bank Income Smoothing During the COVID-19 Pandemic: Evidence from UK Banks," Contemporary Studies in Economic and Financial Analysis, in: The New Digital Era: Other Emerging Risks and Opportunities, volume 109, pages 127-139, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:csefzz:s1569-37592022000109b008
    DOI: 10.1108/S1569-37592022000109B008
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    1. Altavilla, Carlo & Barbiero, Francesca & Boucinha, Miguel & Burlon, Lorenzo, 2023. "The Great Lockdown: Pandemic response policies and bank lending conditions," European Economic Review, Elsevier, vol. 156(C).
    2. Bouvatier, Vincent & Lepetit, Laetitia & Strobel, Frank, 2014. "Bank income smoothing, ownership concentration and the regulatory environment," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 253-270.
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    5. Danisman, Gamze Ozturk & Demir, Ender & Ozili, Peterson, 2021. "Loan loss provisioning of US banks: Economic policy uncertainty and discretionary behavior," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 923-935.
    6. Ashraf, Badar Nadeem, 2020. "Economic impact of government interventions during the COVID-19 pandemic: International evidence from financial markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
    7. Burak Dolar, 2016. "Income Smoothing Practices Of Us Banks Around The 2008 Financial Crisis," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 10(1), pages 1-11.
    8. Caporale, Guglielmo Maria & Alessi, Matteo & Di Colli, Stefano & Lopez, Juan Sergio, 2018. "Loan loss provisions and macroeconomic shocks: Some empirical evidence for italian banks during the crisis," Finance Research Letters, Elsevier, vol. 25(C), pages 239-243.
    9. Demirgüç-Kunt, Asli & Pedraza, Alvaro & Ruiz-Ortega, Claudia, 2021. "Banking sector performance during the COVID-19 crisis," Journal of Banking & Finance, Elsevier, vol. 133(C).
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    More about this item

    Keywords

    Banks; systemic risk; income smoothing; loan loss provisions; COVID-19; pandemic; earnings management; United Kingdom; Britain; G21; G28;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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