Value Relevance of Add-back of Loan Loss Reserves

Under the current bank regulatory capital framework, loan loss reserves (LLR) are added back to regulatory capital up to a certain limit (henceforth, 'add-backs'). This study examines how equity investors value these addbacks. Decomposing LLR into add-backs and other LLR, we find that add-...

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Bibliographic Details
Published in:Seoul Journal of Business 2019, 25(2), , pp.93-114
Main Authors: 김영준, Ahn Hyejin
Format: Article
Language:English
Subjects:
Accounting
Bank failures
Bank reserves
Banking industry
Capital markets
Collateralized loan obligations
Equity
Investments
Loss reserves
Regulation of financial institutions
Shareholders equity
Stockholders
Studies
Tax rates
경영학
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Summary:Under the current bank regulatory capital framework, loan loss reserves (LLR) are added back to regulatory capital up to a certain limit (henceforth, 'add-backs'). This study examines how equity investors value these addbacks. Decomposing LLR into add-backs and other LLR, we find that add-backs have positive value relevance if such add-backs increase total regulatory capital and other LLR has negative value relevance. This positive value relevance of add-backs is driven by banks with low capital levels. Our finding indicates that the market perceives add-backs as capital rather than as an expense.
ISSN:1226-9816
DOI:10.35152/snusjb.2019.25.2.004