Daniel Pérez

Bio: Daniel Pérez is an academic researcher from Bank of Spain. The author has contributed to research in topics: Loan & Earnings. The author has an hindex of 5, co-authored 9 publications receiving 815 citations.

Earnings and Capital Management in Alternative Loan Loss Provision Regulatory Regimes

Abstract: The paper sets an accounting and behavioral framework from which we derive a reduced form equation to test income smoothing and capital management practices through loan loss provisions (PLL) by Spanish banks. Spain offers a unique environment to perform those tests because there are very detailed rules to set aside loan loss provisions and they are not counted as regulatory capital. Using panel data econometric techniques, we find evidence of income smoothing through PLL but not of capital management. The paper draws some lessons for accounting rule setters and banking regulators regarding the current changes in the accounting framework (introduction of IFRS/IAS in Europe) as well as the new capital framework (Basel II). In particular, a very detailed set of rules to set aside loan loss provisions does not prevent managers from decreasing earnings volatility, similarly to what happens in a more principles oriented accounting framework.

Earnings and capital management in alternative loan loss provision regulatory regimes

Abstract: Accounting scholars and policy-makers have expressed concern about the quality of accounting data. Because earnings and capital management practices alter the information content of accounting statements, we ask whether a transparent smoothing device such as the statistical provision – a counter-cyclical bank loan loss provision that increases in economic upturns and decreases in downturns, and is reported separately by banks – may contribute to improving quality of accounting data. We find that Spanish banks use loan loss provisions to smooth earnings but we find no evidence that they practice capital management. We also find that credit risk variables weigh more and net operating income weighs less as determinants of generic and specific loan loss provisions after the introduction of the statistical provision than they did before this provision was introduced. Therefore, the quality of banks' accounting statements improves upon use of the new statistical provision.

Do Dynamic Provisions Reduce Income Smoothing Using Loan Loss Provisions

Abstract: Spanish banks had to set aside a countercyclical loan loss provision during the period 2000 2004. The amount of such provision as well as the allowance accumulated had to be disclosed by banks. The former creates a natural experiment to test whether banks smooth earnings to mislead investors and other interested parties, or, by contrast, income smoothing is used to avoid the existence of market frictions. Using panel data econometric techniques, we find evidence of income smoothing through loan loss provisions during the period previous to the implementation of the countercyclical provision (1988-1999). However, during 2000-2004, banks relied only on the newly created countercyclical provision to smooth income. This change in behavior suggests that there may be efficiency gains in reducing the volatility of accounting earnings over time.

Banking Integration in Europe

Abstract: The paper studies the evolution and determinants of banking integration across European countries, including New Member States, with attention to the impact that the Euro might have on that process It is the first time that banking integration is being studied using the data on international consolidated banking assets provided by the BIS The paper also presents empirical evidence on the determinants of the flow of foreign banking assets across countries of the EU and the Euro area Banking integration in Europe is still low but it progresses over time The empirical evidence also shows that integration is affected by both, competitive and institutional conditions so it can not be viewed as a uniform and balanced process across all countries Finally, evidence is provided indicating that the introduction of the Euro has changed the pace and trend of European banking integration

Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism?

Abstract: Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.

Credit Cycles, Credit Risk, and Prudential Regulation

Abstract: This paper finds strong empirical support of a positive, although quite lagged, relationship between rapid credit growth and loan losses. Moreover, it contains empirical evidence of more lenient credit terms during boom periods, both in terms of screening of borrowers and in collateral requirements. Therefore, we confirm the predictions from theoretical models based on disaster myopia, herd behaviour institutional memory and agency problems between banks' managers and shareholders regarding the incentives of the former to engage in too expansionary credit policies during lending booms. The paper also develops a prudential tool, based on loan loss provisions, for banking regulators in order to cope with the former problem.