THE IMPACT OF RESERVES PRACTICES ON BANK OPACITY

Abstract

This paper finds that banking firms’ unexpected loan loss provisions had a significant effect of increasing bank opacity, both before and during the 2007–2009 financial crisis. Furthermore, during the financial crisis, the extent to which banks delayed loan loss recognition is found to have had a significant effect on bank opacity, confirming an important concern raised by the Financial Crisis Advisory Group. Overall, banks’ practices in managing reserves seem to have a material impact on their opacity.

Keywords

• Bank opacity
• loan loss reserve
• delays in loss recognition