‘Size & Fit’ of Piecemeal Liquidation Processes: Aggravating Circumstances and Side Effects

Abstract

This paper investigates the actual impact of new accounting and regulatory requirements on banks’ provisioning policies and earnings management in the context of the capital adequacy of Euro Area (EA) credit institutions. This paper also examines whether loan-loss provisions signal managements’ expectations concerning future bank profits to investors. Evidence drawn from the 2011-2019 period indicates that earnings management is an important determinant of LLPs for EA intermediaries. During recent years, small bank managers are much more concerned with their credit portfolio quality and do not use LLPs for discretionary purposes apart from income smoothing. The paper gives evidence of a lack of flexibility in the Balance-Sheet of smaller banks and provides some policy refinement to avoid disorderly piecemeal liquidation.