Relationship between loan loss provisions and bank financial measures before loan loss provisions: practices of Russian banks

Abstract

The goal: To assess whether Russian banks adjust loan loss provisions via discretionary component, to identify underlying motives for these adjustments and propose managerial applications on the basis of obtained results. The objectives: • To scrutinize the grounds of loan loss provisioning regulation in Russia and provide the evidence of presence of managerial discretion over estimation of provisions. • To analyze the motivation for adjusting loan loss provisions for Russian banks and provide an overview of research papers devoted to such adjustment practices worldwide • To conduct an empirical study to examine whether Russian banks use discretion in provisions’ estimation and what is the key underlying motivation • To analyze the obtained results and deduce inferences. Main results: Russian banks tend to adjust loan loss provisions via discretionary component; the key motivation for such practices is income smoothing rather than capital management Banks that systematically have income before taxes and provisions to gross assets ratio lower than industry median and banks whose deviation of income before taxes and provisions to gross assets ratio from industry median is the greatest are found to be especially prone to understating of loan loss provisions.