Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212419 
Year of Publication: 
2018
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 11/2018
Publisher: 
Bank of Finland, Helsinki
Abstract: 
The recent financial crises have brought into focus questions regarding the quality of banks' assets. We study the patterns in banks reserving for and reporting of loan losses in the EU before and after implementation of the Single Supervisory Mechanism (SSM). We find that banks that 1) have less tier 1 capital, 2) are smaller, 3) are less liquid and 4) have smaller net interest margins either report relatively smaller loan loss reserves or less loan losses, even after including various controls. This supports the hypothesis that financially weaker banks may have a larger incentive to engage in balance sheet window dressing. We further find that the SSM has reduced but not eliminated the under-reserving and under-reporting bias. In addition, there has been a separate positive effect on the overall proportion of nonperforming loans (NPLs) that are realised as losses among the banks that have been under direct supervision by the SSM since implementation of the SSM.
JEL: 
G18
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-231-0
Document Type: 
Working Paper

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