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Visible Reserves in Banks – Determinants of Initial Creation, Usage and Contribution to Bank Stability
Author(s) -
Bornemann Sven,
Homölle Susanne,
Hubensack Carsten,
Kick Thomas,
Pfingsten Andreas
Publication year - 2014
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12073
Subject(s) - business , german , earnings management , financial stability , capital (architecture) , earnings , capital requirement , financial system , accounting , finance , economics , market economy , archaeology , incentive , history
The opportunity of building up visible “Reserves for General Banking Risks” by the bank management represents a peculiarity in the German financial accounting framework for banks. We investigate German banks' motives for the creation and usage of these reserves and assess their role in financial stability. We find that banks primarily create and use GBR reserves to build up Tier 1 capital for regulatory capital management and earnings management purposes. Most importantly, however, we also reveal that banks using these reserves are less likely to experience a future distress or a bank default event. We therefore conclude that the existence of GBR reserves within the financial accounting framework represents both a convenient capital and earnings management tool for bank managers and a beneficial regulatory instrument to enhance bank stability.