Bank capital, earnings smoothing and provisioning practices in Nigeria: IFRS and risk evidence

Salami, Abdulai Agbaje; U hman, Ahmad Bukola
A icle
Bank capi al, ea nings smoo hing and p o isioning
p ac ices in Nige ia: IFRS and isk e idence
Asian Jou nal o Economics and Banking (AJEB)
P o ided in Coope a ion wi h:
Ho Chi Minh Uni e si y o Banking (HUB), Ho Chi Minh Ci y
Sugges ed Ci a ion: Salami, Abdulai Agbaje; U hman, Ahmad Bukola (2024) : Bank capi al, ea nings
smoo hing and p o isioning p ac ices in Nige ia: IFRS and isk e idence, Asian Jou nal o Economics
and Banking (AJEB), ISSN 2633-7991, Eme ald, Leeds, Vol. 8, Iss. 2, pp. 267-293,
h ps://doi.o g/10.1108/AJEB-05-2022-0058
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/334124
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Bank capi al, ea nings smoo hing
and p o isioning p ac ices in
Nige ia: IFRS and isk e idence
Abdulai Agbaje Salami and Ahmad Bukola U hman
Depa men o Accoun ing, Al-Hikmah Uni e si y Ilo in, Ilo in, Nige ia
Abs ac
Pu pose –This s udy empi ically es s he use o loan loss p o isions (LLPs) o ea nings and capi al
smoo hing when emphasis is laid on banks’ iskiness and adop ion o he In e na ional Financial Repo ing
S anda ds (IFRSs) in Nige ia.
Design/me hodology/app oach –Annual bank-le el da a a e hand-ex ac ed be ween 2007 and 2017 om
annual epo s o a sample 16 deposi money banks (DMBs), and analysed using app op ia e panel eg ession
models subsequen o a numbe o diagnos ic es s including he e oscedas ici y, au oco ela ion and c oss-
sec ional dependence. The use o bo h epo ed LLPs (TLLP) and disc e iona y LLPs (DLLP) o ea nings and
capi al managemen is es ed o ad ance he p ac ice in he li e a u e.
Findings –Gene ally, he s udy inds ha Nige ian DMBs manage capi al ia LLPs, while mixed esul s a e
ob ained o ea nings smoo hing. Howe e , du ing IFRS, Nige ian DMBs’managemen o capi al is iden i iable
wi h TLLP, while smoo hing o ea nings is peculia o DLLP. Addi ionally, e idence o he imp o emen in loan
loss epo ing quali y expec ed du ing IFRS o iskie Nige ian DMBs, could no be a ained. This is
co obo a ed by he s udy’s indings o he use o bo h TLLP and DLLP o ea nings and capi al managemen
du ing IFRS by DMBs in sol ency c isis agains he only use o TLLP o manage capi al ound o he en i e
pe iod.
P ac ical implica ions –The e iden ial capi al and ea nings lopsidedness may subjec Nige ian DMBs’
going-conce n o a lo o ques ions.
O iginali y/ alue –The s udy se s a o emos eco d in he empi ical es o manage ial oppo unis ic
beha iou embedded in ea nings and capi al concu en ly while accoun ing o loan losses by all ca ego ies o
Nige ian DMBs in e ms o iskiness, ollowing accoun ing egime change.
Keywo ds Capi al managemen , Deposi money banks, Ea nings smoo hing, IFRSs, Loan loss p o isions,
Sol ency isk
Pape ype Resea ch pape
1. In oduc ion
Loan loss p o isions (LLPs) ep esen an accoun ing choice and/o acc ual ha a e unique o
he p epa a ion and p esen a ion o inancial epo s o deposi o y inancial ins i u ions
h ough p o ision o all-inclusi e accoun ing in o ma ion o all use g oups. This all-
encompassing ole has a pa o i s componen s, he decisions ela ed o he managemen o
capi al and ea nings smoo hing (Salami, 2021). These wo decisions a e cen al o
adjus men s o LLPs by deposi o y inancial ins i u ions p io and subsequen o he
egula ion by Basel Commi ee on Banking Supe ision (BCBS) (Ahmed e al., 1999;
Ananda ajan e al., 2003,2007).
Apa om he ac ha amoun o capi al held by banks which is e e ed o as capi al
adequacy (Ananda ajan e al.., 2007), is a sign o po en ial o banks o co e o abso b losses,
IFRS in Nige ia
267
© Abdulai Agbaje Salami and Ahmad Bukola U hman. Published in Asian Jou nal o Economics and
Banking. Published by Eme ald Publishing Limi ed. This a icle is published unde he C ea i e
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Recei ed 30 May 2022
Re ised 27 Sep embe 2022
25 May 2023
Accep ed 7 Augus 2023
Asian Jou nal o Economics and
Banking
Vol. 8 No. 2, 2024
pp. 267-293
Eme ald Publishing Limi ed
e-ISSN: 2633-7991
p-ISSN: 2615-9821
DOI 10.1108/AJEB-05-2022-0058
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making e ained ea nings (a i ed a a e adjus men s o loan loss impai men cha ges in he
income s a emen ), one o he componen s o Tie 1 (co e) capi al as equi ed by Basel
s anda ds, unde lines he linkage be ween bank egula o y capi al and accoun ing o loan
losses (Le en is e al., 2011). This a gumen is also espoused by he inclusion o gene al LLPs
in he componen s o bank co e capi al hough es ic ed o 1.25% o isk-weigh ed asse s
(Cen al Bank o Nige ia (CBN), 2010) o imp o e he quali y o capi al being epo ed by
deposi o y inancial ins i u ions (Le en is e al., 2011). As equi ed by he BCBS, minimum
capi al adequacy a io is ixed a 8% (Ananda ajan e al.., 2007;Ozili and Ou a, 2017), bu in
Nige ia h ee ca ego ies a e ecognised: 10% o banks wi h egional o na ional
au ho isa ion; 15% applies o hose wi h in e na ional licensing, while 16% is applicable o
hose wi h domes ic sys emically impo an s a us (CBN, 2015;CBN, 2019). I he capi al a io
o a bank as equi ed by he CBN in Nige ia alls below egula o y benchma k(s), he bank
can be labelled, depending on he le el o inadequacy: “unde capi alised; signi ican ly
unde capi alised; c i ically unde capi alised o insol en ”(CBN, 2010), using he
equi emen s o Supe iso y In e en ion F amewo k (CBN, 2019). Banks’a emp s o
e ade being ca ego ised “unde capi alised”o “insol en ”may compel hem o explo e all
a ailable means o a oiding sanc ions legally o illegally.
The p opo ion o LLPs in banks’acc uals and non-cash expenses accoun ing o no less
han 50% in income s a emen (Salami, 2021) necessi a es he adjus men s upwa d o
downwa d o LLPs, and delayed incu ence o LLPs as a s a egy o ea nings managemen
(Fe nando and Ekanayake, 2015). The posi ion in he li e a u e is ha accoun ing s anda ds
inco po a e some lexible equi emen s ha p omo e bank managemen incen i es o smoo h
ea nings achie able ia adjus men s o LLPs (Aca and Ipci, 2015). These lexibili ies a e
e iden in he co po a e en i ies’managemen p i ilege o c ea e o de e some expendi u e
while a emp ing o de e mine p o i (Healy and Wahlen, 1999). Thus, bank managemen can
selec epo ing me hods, disclosu es and es ima es ha sui hei business models in o de o
appea bes -pe o ming be o e he in es o s and o he s akeholde s (Healy and
Wahlen, 1999).
Since managemen o capi al and ea nings o mee up wi h egula o y equi emen s
in ol e highe le el o manage ial disc e ions, he endency o banks in sol ency c isis
o be indulged in accoun ing manipula ions is highe (Yasuda e al.,2004;Le en is e al.,
2011). This was e ealed ollowing he special audi o deposi money banks (DMBs) in
Nige ia, by he CBN in 2009 (Sanusi, 2010a). The ou comes o 2009 special audi p omp ed
a numbe o e o ms (Sanusi, 2010a,b,2011), he esul s o which he egula o s we e
con inced ha Nige ian inancial sys em is s able, and DMBs a e on sound oo ing
(Sanusi, 2012). Howe e , he e en s ha led o he CBN’s ake-o e o he managemen o
Skye Bank Plc (a bank wi h sys emic impo ance s a us) and i s subsequen collapse
(P osha e, 2017), as well as disposal o p i a e in es o s a e i s acquisi ion o a b idge
bank p o ide he need o empi ical in es iga ion in o he eali y o he use o LLPs o
ea nings and capi al managemen by banks h ea ened by sol ency isk. The celeb a ed
acquisi ion o Diamond Bank Plc by Access Bank Plc wi h acqui ee, ha ing some
eminiscen signs o isk o insol ency, gi en i s e u n o subs an ial amoun o losses
occasioned by high le el o non-pe o ming exposu es in he 2017 accoun ing yea
p o ided ano he es imony.
In Nige ia, p e e ence is gi en o epo ing in he In e na ional Financial Repo ing
S anda ds (IFRSs) by Nige ian DMBs, e en be o e he IFRSs we e o icially adop ed o all
public-in e es en i ies in he coun y (Sanusi, 2012). This lends c edence o he ac ha
Nige ian banking egula o s’con ic ion ha epo ing in globally ecognised p inciples-
based accoun ing s anda ds ha e a endency o imp o e inancial epo ing quali y and
p op ie y as claimed in he li e a u e (Liu and O’Fa ell, 2011;Allehaidan, 2020;Eile e al.,
2021). No wi hs anding his expec a ion, he issue o non-compliance wi h equi emen s o
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IFRSs and ex an law and egula ion le ied agains S anbic IBTC Holdings, wi h subsequen
sanc ions by he Financial Repo ing Council o Nige ia (FRCN) (FRCN, 2015) equi es u he
in es iga ion. Also, he deple ion in capi al and ea nings is no iceable wi h Skye Bank Plc
subsequen o i s acquisi ion (when expec ed o be s onge ) o Mains ee Bank Limi ed
(P osha e, 2017), and se ious non-pe o ming loans c isis is iden i iable wi h Diamond Bank
Plc p io o i s me ge wi h Access Bank Plc may be poin e s o he in luence o non-
pe o ming exposu es epo ing and disc e iona y p o isioning o co po a e ea nings and
bank capi al op imisa ion, ega dless o accoun ing egime.
The necessi y o his s udy which accen ua es i s con ibu ion o he accoun ing o loan
losses li e a u e is in ou old. Fi s , u he a en ion is equi ed o be gi en o ecu ing non-
pe o ming loan c isis and lopsided co po a e epo ing in Nige ia as banks a emp o
op imise hei capi al and ea nings. The e a e ew s udies in his ega d in Nige ia (Ozili, 2015;
A oyebi and Simon, 2018). Second, wi hou p ejudice o he a alanche o s udies es ing he
use o bank p o isions o capi al and ea nings op imisa ion (Cu cio e al., 2017;Capo ale
e al., 2018;Elnahass e al., 2018;Ozili and Ou a, 2018;Ash a e al., 2019;Mu iu and Josea,
2020;T an e al., 2020 and Nikulin and Downing, 2021), he e a e es ic ed numbe o s udies
e en in he las decade, es ing he condi ional e ec o IFRS adop ion on he use o LLPs o
manage ea nings and capi al (Gebha d and No o ny-Fa kas, 2011;Le en is e al., 2011 and
Ozili and Ou a, 2018).
I is also e iden , ollowing he se ies o co po a e bank ailu es on a global pedes al and
he sp ead o IFRS gospel ha he es o he join condi ional e ec o isk o insol ency and
he IFRS adop ion is iden i iable only wi h Le en is e al. (2011). In he Nige ian con ex , he
condi ional e ec o IFRSs on he use o LLPs o manage capi al and ea nings is iden i iable
wi h Ozili (2015) and A oyebi and Simon (2018), while he ocus o Yahaya e al. (2015),Eneje
e al. (2016) and Ozili and Ou a (2019) was only on he use o LLPs o smoo h ea nings. The
conside a ion o olun a y IFRS pe iod by Ozili (2015) canno be conside ed as eal IFRS
epo ing is based on he equi emen s o IFRS 1: Fi s -Time Adop ion o IFRS, while
manda o y pe iod co e ed by Ozili and Ou a (2019) and Eneje e al. (2016) was hal ed o da a
collec ion in 2014 and 2015, espec i ely .
Thi d, he de i a ion o disc e iona y LLPs (DLLP) p o ides mo e e idence o he
managemen o capi al and ea nings by banks (Kwak e al., 2009;Zga ni and Fedhila,
2019;T an e al., 2020). None heless, he e idence becomes mo e obus when mode a ed
by he IFRS adop ion and isk o insol ency as con ained in his s udy. This ad ances he
app oach o Le en is e al. (2011), and e eals mo e in he adjus men s o capi al and
ea nings while accoun ing o loan losses. Fou h, an empi ical pos mo em o he IAS
39: Financial Ins umen s- Recogni ion and Measu emen s egime which is based on
incu ed loss model has he capaci y o e eal le el o p ecau ions equi ed in he
applica ion o IFRS 9: Financial Ins umen s’ ules wi h mo e in-buil disc e iona y
equi emen s. This ask also makes a e ela ion o le el o addi ional o e sigh s equi ed
o he egula o s in he en enchmen o accoun ing quali y in he indus y. Pu e IAS 39
egime in Nige ia o loan loss accoun ing adequa ely co e ed in his s udy was be ween
2012 and 2017.
Apa om con ibu ing o he empi ical a emp s o p o ide means o esol ing high non-
pe o ming exposu es peculia o banks in his pa o he wo ld, he s udy has capaci y o ill
o he gaps. The concu en es o he condi ional e ec o IFRS and sol ency isk while
Nige ian DMBs’a emp o use ac ual/ o al LLPs (TLLP) and/o DLLP o op imise capi al and
ea nings is one, he co e age o he en i e IAS 39 egime is ano he .
The e a e i e addi ional sec ions o li e a u e e iew, me hodology inco po a ing
desc ip ion o a iables and da a, empi ical esul s, discussion o indings and concluding
ema ks a e he backg ound in o ma ion p o ided in his sec ion.
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2. Li e a u e e iew
2.1 Theo e ical backg ound
Bank manage s’mo i e o smoo h/manage ea nings is explained wi h income smoo hing
hypo hesis (Ananda ajan e al.., 2007;Ozili and Ou a, 2019;Salami, 2021), while mo i e o
smoo hing capi al is p emised on capi al managemen hypo hesis (Cu cio e al., 2014;Olszak
e al., 2017). In con as , he need o e o m is explained wi h “ins i u ional change heo y”
when inconsis encies a e obse able in he poli y (Ha ies, 2012).
Income smoo hing hypo hesis desc ibes a si ua ion whe eby a manage akes manage ial
ac ions ha inc ease he epo ed ea nings when income is low and ice e sa (Fudenbe g
and Ti ole, 1995). This emphasises he ac ha smoo hing o ea nings is dependen on he
economic ci cums ance o a i m (Kanaga e nam e al., 2003). Bank managemen eso s o he
disposal o ading secu i ies o pe pe a e eal income smoo hing, while a i icial income
smoo hing in he bank inancial epo ing in ol es he managemen o LLPs (Tak ak e al.,
2010). The basis o capi al managemen hypo hesis is ha he bank managemen is
encou aged o use LLP o manage capi al since some egula o y cos s a e associa ed wi h
capi al equi emen s iola ion (Olszak e al., 2017). In he egula ion o banks, banks a e
compelled o hold he egula o y capi al a io benchma ks (Ananda ajan e al., 2005), ailu e
o which may a ac egula o ’s in e e ence in he bank managemen (Cu cio e al., 2014).
Also, he le el o capi al adequacy o a bank has a ole o play in secu ing app o al o
acquisi ion o ano he bank, and being classi ied as a big o sys emically impo an bank
(Ahmed e al., 1999).
The adjus men s o ules, policies, expec a ions and pa e ns called ins i u ions
(Wege ich, 2001;Kings on, 2019;Samadi and Alipou ian, 2021), go e ning he human
in e ac ions and pa hs o de elopmen s encapsula e ins i u ional change (Coccia, 2018). This
sugges s ha a ue ins i u ional change e lec s an o e haul o he s uc u es and
a chi ec u e o he agencies and o ganisa ions as well as hei ela ionships (Hobley and
Shields, 2000;Wege ich, 2001). The allou o 2009 special audi o banks in Nige ia (Sanusi,
2010a) and subsequen e en s (FRCN, 2015), which necessi a ed a numbe o e o ms
including he es ablishmen o FRCN and he adop ion o IFRS a e a ypical ins i u ional
change scena ios.
Based on imp o ed inancial epo ing disclosu es a ibu able o IFRS epo ing in he
li e a u e (Eile e al., 2021), change in co po a e epo ing no ms and ules gea ed owa ds
a oiding o educing conside ably use o LLPs o ea nings and capi al managemen is
en isaged upon epo ing in IFRS by Nige ian DMBs (Sanusi, 2012). This is he p emise elied
upon in adop ing ins i u ional change heo y alongside income smoo hing and capi al
managemen hypo heses.
2.2 P e ious empi ical indings and hypo heses de elopmen
F om he s udy’s empi ical e iew, i is e iden ha he es o he mode a ing in luence o
IFRS and sol ency isk on he use o p o isions o capi al and ea nings smoo hing is only
a ibu able o Le en is e al. (2011), who ocuses on Eu opean Union (EU) comme cial banks.
Majo i y o o he p e ious s udies, including Nige ian s udies o Ozili (2015),Eneje e al.
(2016),A oyebi and Simon (2018) and Ozili and Ou a (2019), es only he mode a ion o IFRS
epo ing. The e iew inco po a ing he di ec ion o he p e ious indings o de elop he
s udy’s hypo heses is es ic ed o i ually s udies o he pas wo decades.
2.2.1 Ea nings managemen and p o isioning p ac ices. The p o isioning decision mean
o de e mine whe he banks use LLPs o smoo h/manage ea nings is based on he posi i e
impac o ea nings be o e axes and LLPs (EBTL) on p o isioning p ac ices measu ed in he
li e a u e as TLLP and/o DLLP. A coun y-le el, he use o LLPs o ea nings managemen /
smoo hing a e ound by Alali and Jaggi (2011),El Sood (2012),Dola (2016),P
e ez e al. (2008),
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Ca bo-Val e de and Rod iguez-Fe nandez (2018),Pinho and Ma ins (2009),Cu cio e al.
(2014) and Nikulin and Downing (2021). Mo e e idence o he use o LLPs o ea nings
smoo hing/managemen is also iden i iable wi h indings o Abdullah e al. (2013),Adzis e al.
(2015),Misman and Ahmad (2011),Chang e al. (2008),Flo o (2010),Skała (2014),Fe nando
and Ekanayake (2015),Aca and Ipci (2015),Dushku (2016),Schech man and Takeda (2018),
Mu iu and Josea (2020),Le e al. (2021) and Pandey e al. (2022). Fo c oss-coun y s udies, he
empi ical indings o posi i e ela ionship be ween LLPs and EBTL, a e aceable o he
wo ks o Hasan and Wall (2004),Zoubi and Al-Khazali (2007),Fonseca and Gonz
alez (2008),
Bou a ie and Lepe i (2012),Bushman and Williams (2012),Olson and Zoubi (2014),Cu cio
and Hasan (2015),Abdullah e al. (2017),Elnahass e al. (2018),Skała (2018),Zainuldin and Lui
(2020),Doan e al. (2020) and Ozili (2022a).
On he nega i e ela ionship be ween LLPs and EBTL, sugges ing a non-use o LLPs o
ea nings managemen /smoo hing, p e ious ypical empi ical indings a e hose o Ashou
(2011),Alessi e al. (2014),Ash a e al. (2015),Cu cio and Hasan (2015),Abu-Se daneh (2018),
Capo ale e al. (2018),T an e al. (2020) and Shala and Toçi (2021). Using he majo i y o
indings in he LLPs’li e a u e, he i s hypo hesis (H1) is s a ed as ollows:
H1. The e ec o ea nings be o e axes and LLPs on p o isioning p ac ices is posi i e o
Nige ian DMBs
The majo i y o he e idence in he accoun ing o loan-loss li e a u e ega ding he use o
p o isions o smoo h ea nings is a ou able o he imp o ed inancial epo ing quali y upon
he adop ion o IFRSs. This is as ound by No den and S oian (2013),Adzis e al. (2016),A bak
(2017),Ozili and Ou a (2019), anOos e bosch (2009),Gebha d and No o ny-Fa kas (2011),
Le en is e al. (2011),Ash a e al. (2019),Ju asompako n e al. (2021) and Jakub
ıko 
a (2022).
Howe e , he e e sal is ound by Ozili and Ou a (2018) o Sou h A ican banks epo ing in
IFRSs, Eneje e al.. (2016) and A oyebi and Simon (2018) o Nige ian DMBs. Du u and
Tsi inidis (2013) could no es ablish any di e ence in he income smoo hing p ac ices o
banks in No way, Denma k, Finland and Sweden unde bo h na ional he gene ally accep ed
accoun ing p inciples (GAAPs) and IFRSs, while ea nings managemen ia LLPs is ound by
Chen e al. (2021) o con inue subsequen o swi ch o Basel III by Chinese comme cial banks.
Fo he pe iod 2005–2017 in he UK, aces o ea nings smoo hing is epo ed by Ozili (2022b),
excep o he pe iod 2014–2017 when IFRS 9 is applied. EU and sub-Saha an A ican banks’
e idence p o ided by Taylo and Aube (2022), e ealed a educ ion in ea nings smoo hing
upon he adop ion o IFRS 9 bu compa a i ely he educ ion is only iden i iable wi h banks
in Sub-Saha an A ica. Fo Ash a e al. (2015), he coe icien o EBTL is signi ican ly
posi i e o banks in he O ganisa ion o Islamic Coope a ion (OIC) epo ing in IFRSs. F om
mo e e idence o imp o ed use o LLPs o ea nings managemen upon he adop ion o
IFRSs, he s udy p oposes he second hypo hesis (H2) is s a ed as ollows:
H2. The e is educ ion in he use o LLPs o ea nings managemen by Nige ian DMBs
upon he adop ion o IFRSs.
The empi ical e idence o he use o LLPs o manage ea nings by banks h ea ened by isk o
insol ency is epo ed only by Le en is e al. (2011) in he li e a u e. No wi hs anding he
s udy o Le en is e al. (2011), ela ed e idence can be deduced when inancial c isis and o he
isks a e conside ed. As ound by Alali and Jaggi (2011) and Ma and Song (2016), he use o
LLPs o ea nings managemen is ypical o banks wi h high asse isk po olio and sys emic
c ash and dis ess isk, espec i ely. Cu cio e al. (2014),Skała (2014) and Cu cio e al. (2017),
ind ha Chinese, Polish coope a i e, Eu opean a ea banks, espec i ely, engaged in ea nings
smoo hing ia LLPs ega dless o inancial c isis. The e idence in he li e a u e is su icien
enough o p opose he s udy’s hi d hypo hesis (H3) is s a ed as ollows:
IFRS in Nige ia
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H3. The use o LLPs o ea nings managemen is iden i iable wi h Nige ian DMBs
h ea ened by isk o insol ency.
As ound by Le en is e al. (2011), he ela ionship be ween EBTL and LLPs o olun a y
and manda o y adop e s o IFRSs is ound o be signi ican ly nega i e o lis ed EU
comme cial banks h ea ened by sol ency isk. This empi ical esul necessi a es he ou h
hypo hesis (H4) is s a ed as ollows:
H4. The use o LLPs o smoo h ea nings is nega i e du ing IFRSs o Nige ian DMBs in
sol ency c isis.
2.2.2 Capi al managemen and p o isioning p ac ices. Unlike he use o LLPs o ea nings
managemen , he ela ionship be ween bank egula o y capi al measu ed as co e capi al
(CCAR) and/o o al isk-based capi al (TRCAR) (Le en is e al., 2011;Cu cio and Hasan, 2015
and Elnahass e al., 2018), and LLPs should be nega i e o con i m he use o LLPs o capi al
managemen . The e is mo e empi ical e idence o he use o LLPs o manage capi al in he
li e a u e (Ahmed e al., 1999;Ananda ajan e al., 2003,2005;Kanaga e nam e al., 2004;Alali
and Jaggi, 2011 and T an e al., 2020). O he s udies wi h e idence o capi al managemen
include Ananda ajan e al. (2007),Ghosh (2007),Kwak e al. (2009),Pinho and Ma ins (2009),
Flo o (2010),Misman and Ahmad (2011),Ka imiyana e al. (2014),Schech man and Takeda
(2018) and Mu iu and Josea (2020). A c oss-coun y le el, Bou a ie and Lepe i (2012),Ben
O hman and Me sni (2014) and Cu cio and Hasan (2015), ound he use o LLPs o capi al
managemen . In con as , he non-use o LLPs o capi al managemen is epo ed by Lobo
and Yang (2001),Kanaga e nam e al. (2003),Chang e al. (2008),P
e ez e al. (2008),Ashou
(2011),El Sood (2012),Abdullah e al. (2013),Olson and Zoubi (2014),Cu cio and Hasan (2015),
Abdullah e al. (2017),Ca bo-Val e de and Rod iguez-Fe nandez (2018) and Shala and Toçi
(2021), while mixed indings we e epo ed by Collins e al. (1995),Alessi e al. (2014),Adzis
e al. (2015),Abu-Se daneh (2018) and Nikulin and Downing (2021). The p eponde ance o
s udies wi h in e se ela ionship sugges s he i h hypo hesis (H5) o he s udy is s a ed as
ollows:
H5. The in luence o CCAR and TRCAR on p o isioning p ac ices is signi ican ly
nega i e o Nige ian DMBs.
Since he adop ion o IFRS has a ole o play in he measu emen and disclosu e p ac ices
mos especially in he de ini ion o equi y (Le en is e al., 2011), some changes should be
expec ed in he use o LLPs o capi al managemen . As epo ed by Le en is e al. (2011), he
ac o capi al managemen ia LLPs educes upon he adop ion o IFRSs by EU comme cial
banks. Du ing olun a y IFRS pe iod, he use o LLPs o manage capi al was ypical o
Nige ian DMBs as ound by Ozili (2015). Howe e , du ing manda o y pe iod, A oyebi and
Simon (2018) could no es ablish p ac ice o capi al managemen ia LLPs by Nige ian DMBs.
While A bak (2017) epo ed mixed indings o he use and non-use o LLPs o manage capi al
based on esul s o panel ixed-e ec s model and Gene alised Me hod o Momen s
espec i ely, Ash a e al. (2019) could no es ablish use LLPs o capi al managemen
subsequen o in e ac ion wi h p incipled-based accoun ing s anda ds. In con as , Le e al.
(2021) and Chen e al. (2021) e eal he use o LLPs o manage capi al subsequen o
Vie namese banking es uc u ing p og amme and Chinese comme cial banks’swi ch o
Basel III, espec i ely. The inc ease in capi al managemen is no iceable in he loan loss
beha iou o Eu opean banks upon hei swi ch o Basel III as ound by Ju asompako n e al.
(2021). Based on he o egoing IFRS e idence, i is hypo hesised he six h hypo hesis (H6)is
s a ed as ollows:
H6. The in luence o CCAR and TRCAR on p o isioning p ac ices is signi ican ly
posi i e o Nige ian DMBs du ing IFRS.
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The ele an e idence o he use o LLPs o manage capi al is ound by Le en is e al. (2011)
o EU lis ed banks h ea ened by isk o insol ency hough s a is ically insigni ican .
Howe e , he inding o Elnahass e al. (2018) shows hose con en ional banks wi h loss-
gene a ing a ibu es in Jo dan, Bah ain and Qa a ha e he habi o using LLPs o manage
capi al wi hin he sampled pe iod 2007–2013, which is inclusi e o inancial c isis pe iod o
2007–2009. These indings a e elied upon o hypo hesis (H7) is s a ed as ollows:
H7. The in luence o CCAR and TRCAR on p o isioning p ac ices is signi ican ly
nega i e o Nige ian DMBs h ea ened by sol ency isk.
The sole e idence ound by Le en is e al. (2011) is ha iskie EU comme cial banks do no
use LLPs o capi al managemen upon he adop ion o IFRSs, gi en he insigni ican posi i e
coe icien o measu e capi al managemen . Based on his e idence, ela ed hypo hesis (H8)
abou he use o LLPs o manage bank capi al by iskie Nige ian DMBs du ing IFRS is s a ed
as ollows:
H8. The in luence o CCAR and TRCAR on p o isioning p ac ices is signi ican ly
posi i e o Nige ian DMBs h ea ened by sol ency isk du ing IFRS.
3. Me hodology
3.1 Resea ch design and da a
The app op ia eness o longi udinal design o he s udy is based on he le el a which he
da a was collec ed o he s udy. Howe e , longi udinal coho design is ound mo e
app op ia e because banks which a e he s udy’s uni s o analysis p o ide undi e en ia ed
se ices. While he s udy’s popula ion is all Nige ian deposi o y inancial ins i u ions,
ele an da a a e hand-ex ac ed om annual epo s o Nige ian DMBs. The c i e ia used o
selec DMBs included in he sample a e: (1) DMB is lis ed on Nige ian Exchange G oup (NGX);
(2) DMB is no lis ed bu o one eason o he o he has i s inancial in o ma ion in public
domain; (3) DMB has me ged wi h ano he bank, been acqui ed by a bigge bank o been
delis ed om NGX bu has inancial in o ma ion co e ing 60% o sampled pe iod and (4)
DMB mus ha e ele an in o ma ion ela ed o he s udy’s a iables co e ing no less han
60% o he pe iod 2007–2017 co e ed by he s udy whe he ope a ing in i s b and name o
has been delis ed. Based on he c i e ia, a sample o 16 DMBs is selec ed o analysis. The da a
a e ob ained o he pe iod 2007–2017. The sampled pe iod 2007–2017 is selec ed because i
coincided wi h pe iod in o ma ion on Basel’s bank capi al adequacy a io became accessible
in he inancial epo s o banks in Nige ia, gi en egula o y di ec i es and IFRSs we e
adop ed in Nige ia. Howe e , he in o ma ion ela ed o 2018 and beyond which also belong o
IFRS pe iod is excluded, owing o change in accoun ing o loan losses om IAS 39: Incu ed
Loan Loss Model o IFRS 9: Expec ed C edi Loss Model which can dis o he s udy’s indings.
Besides, he so-called IFRS 9 adop ion o loan loss epo ing is o be pa ially implemen ed
o he i s ou yea s (1 Janua y 2018 o 31 Decembe 2021) based on he CBN di ec i es.
The e o e, o an 11-yea pe iod o collec ion o da a and a sample o 16 DMBs, 176 i m-yea
obse a ions o bank-le el da a a e p obable. Howe e , due o me ge and acquisi ion,
delis ing and missing annual epo s o some DMBs, an unbalanced panel da ase o 169
bank-yea obse a ions is e en ually used o da a analysis.
3.2 Es ima ion echniques
Apa om panel eg ession analysis o which s udy’s hypo heses a e es ed, basic
desc ip i e s a is ics a e also pe o med o iden i y basic cha ac e is ics o he sampled
DMBs. The p ocess in ol ed in panel eg ession model ollowed a ou s panel co ec ed
IFRS in Nige ia
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s anda d e o s (PCSEs) in models p esen ed in Tables 1 and 2compa ed o hose in
Table 3. This is subjec o he pooled o dina y leas squa ed (pooled OLS) and/o panel
ixed-e ec s (panel FE) models ha ing he e oscedas ici y, se ial co ela ion a i s o de
and c oss-sec ional dependence. B eusch-Pagan/Cook-Weisbe g es inco po a ing i ed
alues o TLLP and DLLP (BPW-H1) and BPCW wi h explana o y a iables (BPW-H2)
a e pe o med o de ec he p esence o he e oscedas ici y in pooled OLS, while
Woold idge es o he e oscedas ici y (W-HET) is pe o med o panel FE. Ne e heless,
Woold idge es o he i s -o de au oco ela ion-WAR(1) and Pesa an c oss-sec ional
dependence (PCD) es a e pe o med ega dless o panel FE and pooled OLS. Thus, P ais-
Wins en eg ession co ela ed wi h PCSEs (PCSE-PW), which has capaci y o co ec
he e oscedas ic, panel i s -o de au oco ela ed and/o con empo aneous au oco ela ed
e o s uc u es and c oss-sec ional dependence (Blackwell, 2005;Solano e al.,2020)is
adop ed o models wi h in e ac ion a iables whe e issues o he e oscedas ic,
au oco ela ed esiduals and c oss-sec ional dependence a e e iden as p esen ed in
Tables 1 and 2. PCSE-PW is also applicable as e iden in his s udy, whe e numbe
o c oss-sec ions is highe han numbe o ime se ies o da a collec ion (N > T)
and da ase s a e unbalanced (Beck and Ka z, 1995;Solano e al.,2020). The eg ession
models a e p eceded by p elimina y analyses o es ing he p esence o mul i-
collinea i y, which include a iance in la ion ac o (VIF), pai wise co ela ion analysis
and condi ion index.
Va iable
Dependen a iable: TLLP Dependen a iable: ADLLP
Coe icien PCSE z p>jzjCoe icien PCSE z p>jzj
CCAR 0.1032 0.0714 1.45 0.148 0.0873* 0.0238 3.66 0.000
EBTL 1.7820
λ
0.6976 2.55 0.011 0.4821* 0.1791 2.69 0.007
IFRS 0.1298* 0.0265 4.89 0.000 0.0433* 0.0088 4.91 0.000
IFRS*CCAR 0.3219* 0.1116 2.88 0.004 0.0719
λ
0.0360 2.00 0.046
IFRS*EBTL 1.8577* 0.7031 2.64 0.008 0.6392* 0.1838 3.48 0.001
SVR 0.1217* 0.0286 4.26 0.000 0.0031 0.0056 0.56 0.577
SVR*CCAR 0.0314 0.0916 0.34 0.732 0.0807* 0.0289 2.79 0.005
SVR*EBTL 2.4116* 0.7233 3.33 0.001 0.2568 0.2116 1.21 0.225
IFRS*SVR*CCAR 1.0754* 0.1416 7.59 0.000 0.0716
λ
0.0336 2.13 0.033
IFRS*SVR*EBTL 1.8429
λ
0.8848 2.08 0.037 0.4334 0.2926 1.48 0.139
ΔNPL 0.0038
ø
0.0020 1.90 0.057 ––––
LTA ––––0.0342 0.0222 1.54 0.124
LEV 0.0018* 0.0002 8.28 0.000 0.0000 0.0001 0.30 0.766
LgTA 0.0158
λ
0.0065 2.41 0.016 0.0023 0.0024 0.95 0.341
LST 0.0123 0.0125 0.98 0.325 0.0015 0.0033 0.44 0.661
_cons 0.3863* 0.1479 2.61 0.009 0.1287* 0.0465 2.77 0.006
HUS 30.05(0.0046)* 7.76(0.8588)
W-HET 97875.26(0.0000)* –
LM –0.00(1.0000)
BPW-H1 –37.45(0.0000)*
BPW-H2 –41.40(0.0000)*
WAR(1) 7.624(0.0146)
λ
5.958(0.0275)
λ
PCD 2.770(0.0056)* 3.331(0.0018)*
R
2
0.884 0.526
Wald 520.50(0.0000)* 2915.69(0.0000)*
Model Type PCSE-PW PCSE-PW
Obse a ion 169 169
Sou ce(s): Au ho s’compu a ion (2020) using ou pu s om STATA 14. O he han R
2
, diagnos ic s a is ics
a e epo ed wi h p- alue in pa en heses.
ø
,
λ
and * indica e signi icance a 90%, 95% and 99% le els o
s a is ical con idence, espec i ely
Table 1.
Reg ession es ima es
es ing capi al
managemen (CCAR)
and ea nings
smoo hing including
IFRS and isk
in e ac ions wi h
p o isions
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Though Z-SCORE is no one o he s udy’s a iables, i is included because sol ency isk
(SVR) conside ed a mode a ing a iable is de i ed om i . Based on he numbe o
obse a ions o less isky banks which is 84 agains 85 o less isky banks, he e is no doub
ha la ge p opo ion o Nige ian DMBs is h ea ened by isk o insol ency wi hin he
sampled pe iod. ADLLP ep esen s absolu e alues o DLLP, indica ing absolu e alues o
esidual e ms de i ed om equa ion (1).
4.2 Mul i-collinea i y es s
I he esul s o VIF p esen ed in Table 7 a e solely elied upon, he e is no mul i-collinea i y
p oblem in he s udy’s models. As e ealed in Table 7, he e is no any a iable wi h VIF wid h
>10, ole ance 1
VIF<0.1 and R-squa ed >0.9. Ha ing VIF o each a iable and mean VIF >10,
ole ance <0.1 and R-squa ed >0.9 is ou side he h eshold o mul i-collinea i y (Guja a i and
Po e , 2009). In con as , pai wise co ela ion ma ix p esen ed in Table 8 e eals ha TRCAR
and CCAR canno be used oge he in he same model gi en a co ela ion coe icien >0.8
sugges ed by B ooks (2008).Thisiscon i medby he esul so condi ionindexp esen edin
Table 9 wi h an o e all condi ion numbe o 115.87 being in excess o 30 se by Guja a i and
Po e (2009). Since wo o he es s o mul i-collinea i y conduc ed gi e e idence o mul i-
collinea i y p oblem in he s udy’s models, CCAR and TRCAR, a e indi idually included in
sepa a e models. This necessi a es es ima ing wo eg ession models o each o equa ions (2)–(5).
CCAR TRCAR EBTL IFRS SVR ΔNPL LTA LEV LgTA LST
CCAR 1.00
TRCAR 0.88* 1.00
EBTL 0.27* 0.15* 1.00
IFRS 0.08 0.14 0.23* 1.00
SVR 0.42* 0.36* 0.33* 0.07 1.00
ΔNPL 0.11 0.06 0.02 0.17* 0.10 1.00
LTA 0.08 0.07 0.28* 0.01 0.02 0.18* 1.00
LEV 0.07 0.09 0.07 0.08 0.14 0.05 0.12 1.00
LgTA 0.30* 0.23* 0.27* 0.41* 0.24* 0.05 0.03 0.12 1.00
LST 0.09 0.06 0.16* 0.12 0.07 0.03 0.10 0.03 0.47* 1.00
Sou ce(s): Au ho s’compu a ion (2020) using ou pu s om STATA 14. * indica es signi icance a 5% le el o
signi icance
Va iable VIF ffiffiffiffiffiffiffiffi
VIF
p1
VIF R2
CCAR 5.12 2.26 0.1952 0.8048
TRCAR 4.71 2.17 0.2124 0.7876
EBTL 1.50 1.22 0.6678 0.3322
IFRS 1.47 1.21 0.6816 0.3184
SVR 1.48 1.21 0.6776 0.3224
ΔNPL 1.10 1.05 0.9095 0.0905
LTA 1.22 1.11 0.8166 0.1834
LEV 1.07 1.04 0.9303 0.0697
LgTA 1.90 1.38 0.5272 0.4728
LST 1.43 1.20 0.6992 0.3008
Mean VIF 2.10
Sou ce(s): Au ho s’compu a ion (2020) using ou pu s om STATA 14
Table 8.
Pai wise co ela ion
ma ix o non-
in e ac ion
explana o y a iables
Table 7.
Va iance in la ion
ac o o non-
explana o y a iables
IFRS in Nige ia
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4.3 Reg ession esul s
4.3.1 Es ima es o Kanaga e nam’se al. (2003) model. To de e mine whe he Nige ian DMBs
use DLLP o manage ea nings and capi al, he app oach o Kanaga e nam e al. (2003) is
ollowed o es ima e DLLP om equa ion (1). Following he app oach o a numbe o p e ious
s udies (Kanaga e nam e al., 2003;Kwak e al., 2009;Lassoued e al., 2017;Zainuldin and Lui,
2020), equa ion (1) is es ima ed using OLS. Howe e , he need o co ec au oco ela ed and
he e oscedas ic dis u bances (BPW-H1, BPW-H2 and WAR(1) being signi ican a p- alue
<5%) necessi a es he applica ion o OLS co ela ed wi h PCSE (PCSE-OLS) as p esen ed in
Table 10.
The eg ession es ima es in Table 10 a e a con i ma ion in he li e a u e ha inc ease in
non-pe o ming loans and change in loans and non-pe o ming loans p omp inc ease in
LLPs (Kanaga e nam e al., 2003,2004;Shaw a i e al., 2015) wi h signi ican ly posi i e
coe icien s a p- alue less han 1%, 10% and 1%, espec i ely. The esiduals o eg ession
model p esen ed in Table 10 a e used as DLLP. Howe e , gi en he ac ha DLLP as a
measu e o ea nings smoo hing o managemen could be income-inc easing wi h nega i e
Eigen alues Condi ion index
1 6.0848 1.0000
2 1.4005 2.0844
3 0.9020 2.5973
4 0.7775 2.7976
5 0.6153 3.1447
6 0.5642 3.2841
7 0.3017 4.4909
8 0.2475 4.9580
9 0.0708 9.2727
10 0.0353 13.1200
11 0.0005 115.8721
Condi ion Numbe 115.8721
Sou ce(s): Au ho s’compu a ion (2020) using ou pu s om STATA 14
Va iable
Dependen a iable: LLPV
Coe icien z p- alue
NPFL
( -1)
0.0994543* 10.45 0.000
CHNPFL 0.0144808* 12.37 0.000
CHGLOAN 0.0090474
ø
1.75 0.080
_cons 0.0178782* 5.31 0.000
R
2
0.1802
Wald 239.47(0.000)*
BPW-H1 22.29(0.0000)*
BPW-H2 38.08(0.0000)*
WAR(1) 30.87(0.0001)*
Obse a ion 169
Model Type PCSE-OLS
Sou ce(s): Au ho s’compu a ion (2020) using ou pu s om STATA 14. O he han R
2
diagnos ic s a is ics
a e epo ed wi h p- alue in pa en heses. * and
ø
a e signs o signi icance o eg ession coe icien s and o he
s a is ics a 99% and 90% le els o con idence, espec i ely. PCSE-OLS deno es OLS wi h co ela ed Panels-
Co ec ed S anda d E o s
Table 9.
Eigen alues and
condi ion index
Table 10.
Reg ession es ima es
o Kanaga e nam’s
e al. (2003) loan
loss model
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DLLP o income-dec easing wi h posi i e DLLP, absolu e alue o DLLP (ADLLP) is adop ed
as he dependen a iable in he ele an models o he s udy (see, o ins ance, Lassoued e al.,
2017;Qu ainah e al., 2013;Zainuldin and Lui, 2020).
4.3.2 Hypo heses es ing. Hypo heses ela ed o use o p o isions o ea nings and capi al
managemen wi hou IFRS and isk o insol ency in e ac ion (hypo heses 1 and 5) a e es ed
by es ima ing equa ions (2) and (3), while hose wi h IFRS and sol ency isk in e ac ion
(hypo heses 2,3,4,6,7and 8) a e es ed using he es ima es o equa ions (4) and (5).
The esul s o he es ima ion o equa ions (2) and (3) a e p esen ed in Table 3 while hose o
equa ions (4) and (5) a e p esen ed in Tables 1 and 2, espec i ely. The eg ession esul s o
es s o he use o LLPs o manage capi al and ea nings p esen ed in Table 3 show ha
models adop ed a e panel FE and pooled OLS. This is based on he signi icance o Hausman
s a is ics (HUS) and B eusch-Pagan Lang ange Mul iplie es (LM) o panel FE and pooled
OLS, espec i ely, wi hou he join signi icance o he e oscedas ici y, se ial co ela ion and
c oss-sec ional dependence es s. In con as , he concu en signi icance o
he e oscedas ici y, au oco ela ion and c oss-sec ional dependence s a is ics a p- alue
<0.05 necessi a es he ejec ion o he assump ions o homoscedas ici y, no i s -o de
au oco ela ion and no c oss-sec ional dependence as e iden in Tables 1 and 2, espec i ely.
This is p emised on he adop ion o PCSE-PW o models p esen ed in Tables 1 and 2.
F om eg ession es ima es, Table 3 depic s ha Nige ian DMBs use p o isions o manage
capi al gi en he signi ican ly nega i e coe icien s o CCAR and TRCAR, excep ha he
coe icien o TRCAR is insigni ican in he model wi h ADLLP as dependen a iable. This is a
dependable poin e o he accep ance o hypo hesis 5. Ea nings be o e axes and LLPs (EBTL)
posi i e in luence on TLLP a p- alue <0.01 sugges s ha Nige ian DMBs use ac ual LLP
(TLLP) o manage o smoo h ea nings a he han disc e iona y LLP (DLLP) based on EBTL’s
signi ican ly nega i e in luence on ADLLP a p- alue <0.01. Thus, he i s hypo hesis can be
accep ed i he use o TLLP a he han DLLP o ea nings smoo hing is p io i ised. O he
esul s o no e a e he nega i e coe icien s o le e age (LEV) bu only signi ican in he model
wi h TRCAR as independen a iable and hose o DMBs’size as measu ed by na u al
loga i hm o o al asse s (LgTA). Also, no clea -cu conclusion can be made on he impac o
changes in non-pe o ming loans (ΔNPL) as he coe icien s a e insigni ican .
Fo he eg ession esul s showing he es s o hypo heses inco po a ing mode a ion o
IFRS and sol ency isk p esen ed in Tables 1 and 2, panel model p ocedu e ollowed a ou s
he applica ion o PCSE-PW. This is sequel o join signi icance o BPW-H1 and BPW-H2 ( o
pooled OLS) o W-HET ( o panel FE), WAR(1) and PCD.
F om eg ession coe icien s, i is e ealed ha CCAR/TRCAR has posi i e impac on TLLP
bu signi ican ly nega i e e ec on ADLLP. This e eals ha Nige ian DMBs use disc e iona y
p o isions (DLLP) o manage capi al a he han use epo ed p o isions (TLLP) o manage
capi al. Also, he signi ican ly posi i e coe icien o ea nings be o e axes and LLP (EBTL) in he
TLLP model is an indica ion o use o ac ual o epo ed LLPs o manage ea nings. On he
con a y, he signi ican nega i e coe icien o EBTL sugges s ha Nige ian DMBs do no use
disc e iona y p o isions (DLLP) o manage ea nings in he model wi h ADLLP as independen
a iable. The e is also e idence ha du ing IFRS loan loss cha ges a e on he inc ease, while
disc e iona y p o isions a e alling gi en signi ican ly posi i e and nega i e coe icien s o IFRS
in bo h models in each able. Howe e , wi h signi ican ly nega i e (in TLLP model) and posi i e
(in ADLLP model) coe icien s o IFRS*CCAR and IFRS*TRCAR, DMBs use epo ed LLPs
a he han disc e iona y p o isions o manage capi al du ing IFRS.
Con a y esul s a e also es ablished wi h he coe icien s o IFRS*EBTL in bo h models
as e iden in each Tables 1 and 2. Nige ian DMBs a e no ound o be using o al p o isions
(TLLP) o manage ea nings gi en he signi ican ly nega i e coe icien s o IFRS*EBTL in he
models wi h TLLP as dependen a iable while e idence o ea nings managemen using
disc e iona y p o isions (DLLP) is es ablished, gi en he signi ican ly posi i e coe icien o
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IFRS*EBTL in he models wi h ADLLP as dependen a iable. In he a ea o isk, sol ency
isk is ound o be con ibu o y o inc ease in le el o p o isioning based on he posi i e
coe icien s o SVR in all models in Tables 1 and 2 excep ha SVR coe icien s a e no
signi ican in he models wi h ADLLP as dependen a iable. While Nige ian DMBs
h ea ened by sol ency isk use LLPs o manage capi al based on he nega i e coe icien s o
SVR*CCAR and SVR*TRCAR hough coe icien o SVR*CCAR is no signi ican , p o isions
a e no used o manage ea nings as SVR*EBTL coe icien is signi ican ly nega i e in he
model wi h TLLP as dependen a iable. In con as , Nige ian DMBs h ea ened by sol ency
isk a e ound no o be using disc e iona y p o isions (DLLP) o manage capi al as he
coe icien s o SVR*CCAR and SVR*TRCAR a e signi ican ly posi i e a p- alue <0.01. The
non-use o p o isions o manage ea nings by DMBs h ea ened by sol ency isk is ein o ced
wi h he nega i e coe icien o SVR*EBTL in he model wi h ADLLP as dependen a iable
excep ha he coe icien is no signi ican in he model, including CCAR. Howe e , in he
IFRS pe iod, Nige ian DMBs h ea ened by sol ency isk use LLPs ega dless o measu e
o manage capi al gi en he signi ican ly nega i e coe icien s o IFRS*SVR*CCAR and
IFRS*SVR*TRCAR. This is also simila o he use o LLP o manage ea nings du ing IFRS by
DMBs h ea ened by sol ency isk as he coe icien o IFRS*SVR*EBTL is posi i e ac oss
all models hough no signi ican in wo o he models.
Based on he esul s p esen ed in Tables 1 and 2, he e en ion o hypo heses 2 and 6 will be
based on he assump ions ha DLLP a he han TLLP and TLLP a he han DLLP a e used
o manage ea nings and capi al, espec i ely, in Nige ia in he IFRS egime. While he hi d
hypo hesis is ejec ed because oubled Nige ian DMBs a e no ound o used LLPs o smoo h
ea nings, he e en ion o hypo hesis 7 is based on he assump ion ha Nige ian DMBs
h ea ened by isk o insol ency use DLLP a he han TLLP o manage capi al. None heless,
e idence o use o bo h TLLP and DLLP o smoo h ea nings and capi al by Nige ian DMBs in
sol ency c isis a e epo ed, he e o e, bo h hypo heses 4 and 8 a e e ained.
Fo con ol a iables, change in non-pe o ming loans (ΔNPL) is posi i ely ela ed o
p o isioning p ac ices hough no signi ican in he TRCAR model. To al loans- o- o al asse s
(LTA) ha e insigni ican nega i e impac on p o isioning decisions, gi en nega i e
coe icien o LTA. O he con ol a iables o LEV, LgTA and LST ha e con lic ing sign
o nega i e and posi i e coe icien s in bo h models in each o Tables 1 and 2.
5. Discussion o indings
F om he esul s o analysis o unbalanced panel da ase s o sampled 16 Nige ian DMBs, i is
e iden ha Nige ian banks, wi hou he in e ac ion o IFRSs and sol ency isk, use LLPs o
manage capi al gi en nega i e coe icien s o CCAR and TRCAR, while mixed esul s a e
ound o he use o LLPs o smoo h o manage ea nings. Using LLPs o manage capi al
ega dless o ype o capi al and app oach o p o isioning. This means ha Nige ian banks
use bo h epo ed LLPs and disc e iona y p o isions o manage bo h CCAR and TRCAR. By
his, i is e iden ha he collapse o Nige ian DMBs in he pas can be aced o manipula ion
o capi al adequacy a ios in o de o appea well-capi alised using he ins umen ali y o loan
loss epo ing. This is in consonance wi h he p oposi ion o capi al managemen hypo hesis
adop ed in his s udy. A con i ma ion o he use o LLPs o egula o y capi al managemen
es ablished in his s udy is compa able o a numbe o p e ious s udies including ecen ones
o Schech man and Takeda (2018) and Mu iu and Josea (2020). Fo ea nings managemen , he
ela ionship be ween ea nings be o e axes and LLPs (EBTL) and TLLP, which is
signi ican ly posi i e is an indica ion o use o LLPs o smoo h ea nings and a
con i ma ion o income-smoo hing hypo hesis. In con as , signi ican ly nega i e
coe icien o EBTL in he model wi h ADLLP as dependen a iable e eals ha Nige ian
DMBs use o al LLPs a he han DLLP o smoo h ea nings. This is an indica ion ha , in he
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Nige ian con ex , some disc e iona y endencies a e imbedded in non-disc e iona y
p o isions used by Nige ian banks o smoo h ea nings. The use o epo ed LLPs by
Nige ian DMBs o manage o smoo h ea nings ound in his s udy, is compa able o indings
o Elnahass e al. (2018),Skała (2018),Zainuldin and Lui (2020),Doan e al. (2020),Ozili (2022a)
and Pandey e al. (2022) bu con a y o ha o Shala and Toçi (2021).
Rega dless o he na u e o capi al and ea nings managemen , ha is, whe he achie ed
ia TLLP o DLLP, he p esence o bo h ac s ques ions he going conce n o Nige ian DMBs.
The collapsed DMBs in he las one and hal decades and hose ha we e bailed ou by he
CBN and he Asse s Managemen Co po a ion o Nige ia (AMCON), we e ound guil y o
unholy capi al and ea nings op imisa ion (Sanusi, 2010a,2012;P osha e, 2017). The
disc e iona y use o LLPs o capi al and ea nings smoo hing may also nega i ely a ec he
in e na ional ele ance and a ing o Nige ian DMBs as well as hei access o Global
Deposi o y Receip s some o hem a e known o .
The adop ion o IFRS has b ough abou inc ease in he le el o epo ed LLPs bu dec ease
in DLLP. An inc ease in epo ed LLPs may sugges a coun e -cyclical p o isioning, while a
dec ease in DLLP is ypical o educ ion in ea nings smoo hing which may be synonymous o
imp o ed inancial epo ing quali y. Howe e , he isk o insol ency is ound o inc ease he
p o isioning le el o Nige ian DMBs ega dless o whe he ac ual o disc e iona y. The
di e en ci cums ances o ac ual LLPs and disc e iona y LLPs du ing IFRS ha e p omp ed
mixed use o p o isions o ea nings and capi al managemen be ween TLLP andDLLP. While
he IFRS aids he use o epo ed LLPs o capi al managemen , i discou ages he use o
disc e iona y p o isions o he same pu pose. This is also he case o he use o LLPs o
ea nings managemen du ing IFRS. Managing ea nings ia disc e iona y LLPs is p io i ised
compa ed o TLLP. Capi al managemen o banks h ea ened by sol ency isk is p onounced
ia disc e iona y LLPs bu e e sed using epo ed LLPs. Howe e , he DMBs h ea ened by
sol ency isk a e no ound culpable in he use o p o isions whe he ac ual o disc e iona y o
smoo h o manage ea nings. This implies ha in es o s a e likely o be aced wi h a g ea deal
o indecision as ega ds he use o LLPs o ea nings and capi al managemen by Nige ian
DMBs. Ne e heless, he in es o s o any s akeholde s ha e he oppo uni y o being
ca ego ical in hei decisions ega ding DMBs h ea ened by sol ency isk use o LLPs o
ea nings and capi al managemen du ing IFRS as coe icien s o IFRS*SVR*CCAR/TRCAR
and IFRS*SVR*EBTL a e nega i e and posi i e, espec i ely.
The non-use o ac ual LLPs (TLLP) o ea nings managemen du ing IFRS in Nige ia can
be likened o he indings o Abdullah and Bujang (2016),A bak (2017),Ozili and Ou a (2019)
Ju asompako n e al. (2021),Jakub
ıko 
a (2022),Ozili (2022b) o IFRS 9 pe iod and Taylo and
Aube (2022) bu con a y o he indings o Ash a e al. (2015),A oyebi and Simon (2018)
and Taylo and Aube (2022) o EU banks. The non-use o LLPs o smoo h ea nings by
iskie Nige ian DMBs ound in his s udy disag ees wi h indings o Le en is e al. (2011),
while e idence o ea nings managemen ia LLPs by iskie Nige ia DMBs du ing IFRS
con as s empi ical conclusion o Le en is e al. (2011). Though con a y e idence is epo ed
by A oyebi and Simon (2018), e idence o he use o TLLP by DMBs o manage capi al du ing
IFRS ound in his s udy, is a con i ma ion o p e ious indings o Ozili (2015),A bak (2017),
Le en is e al. (2011) and Ju asompako n e al. (2021). Some le els o ag eemen be ween he
indings o his s udy and hose o Le en is e al. (2011) ega ding he use o TLLP by iskie
banks o capi al managemen a e es ablished bu con a y o he e iden inc eased capi al
managemen p ac ices ia LLPs by iskie Nige ian DMBs du ing IFRS. Howe e , uniquely
iden i iable wi h his s udy in he loan loss accoun ing li e a u e a e e idence o use o DLLP
o manage ea nings du ing IFRS, non-use o DLLP o manage ea nings by iskie banks, non-
use o DLLP o manage capi al du ing IFRS and by iskie banks and he use o DLLP o
manage capi al by iskie banks du ing IFRS.
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The e idence o he use o LLPs o manage capi al ound in his s udy may shi he
a en ion o CBN om DMBs ha a e ailing o hose belie ed o be in good inancial
condi ion because o hei sa is ac o y capi al base. The sa is ac o y capi al base may be a
use as he p ocess o de e mining i appea s o be subjec o manage ial disc e iona y
beha iou embedded in LLPs epo ing. Ano he implica ion is ha i migh be somehow
di icul o ca ego ically s a e ha he e is imp o emen in he inancial epo ing quali y o
Nige ian DMBs despi e he e idence o educ ion in DLLP du ing IFRS. This is due o he ac
ha accoun ing in o ma ion u nished in ela ion o Nige ian DMBs’capi al and ea nings
appea s no o ep esen wha i pu po s o owing o e iden ial capi al and ea nings
smoo hing while epo ing in IFRS. The endency o analy ical in es o s and cus ome s o
lose con idence in he eliabili y o he in o ma ion con ained in he Nige ian DMBs’ inancial
epo s is highe gi en palpable lopsidedness in ea nings and capi al op imisa ion. The
con idence in he e icacy o e o ms may also be subjec o some doub s as issues o inancial
epo ing imp op ie y ha p omp ed he IFRS adop ion s ill subsis .
6. Conclusions
Despi e he e idence o educ ion in disc e iona yp o isioningupon headop iono IFRSsin
Nige ia, he inabili y o IFRS epo ing o imp o e loan loss epo ing in e ms o he use o LLPs
o manage capi al and ea nings does no only equi e inc ease in epo ing equi emen s bu also
equi es he FRCN (as a complemen o ac i i ies o he CBN), e-sha pening i s egula o y
o e sigh s. The FRCN is also expec ed o adop ela ed inancial epo ing guidelines ha can
imp o e loan loss epo ing in Nige ia. While he conduc o s ess es s by CBN as ensh ined in
Basel III is app eciable, he posi i e ela ionship be ween sol ency isk and disc e iona y
p o isioning ound in his s udy sugges s ha s ess es ingshouldbemadeinsho - e m
pe iodic in e als, imely, based on indi idual banks (agains he p esen consolida ed app oach)
and published o he gene al public o discou age excessi e disc e iona y p o isioning.
Al hough he swi ch om IAS 39 loan loss model o IFRS 9 model o loan loss epo ing in
Nige ia is unde s andable, some le els o p ecau ion a e equi ed o a oid Spanish scena io
epo ed by Ca bo-Val e de and Rod iguez-Fe nandez (2018), whe e ea nings smoo hing was
ound o linge subsequen o he adop ion o dynamic p o isioning and B azilian si ua ion
whe e no di e ence can be spo ed in he ea nings managemen p ac ices o B azilian banks,
using IAS 39 and hyb id model o B azilian Cen al Bank accoun ing p inciples (Galdi e al.,
2021). The e a e also e idence o con inua ion and inc ease in he ea nings and capi al
smoo hing p ac ices ia LLPs by Chinese and Eu opean banks, espec i ely, subsequen o he
adop ion o Basel III (Chen e al.,2021;Ju asompako n e al.,2021). The con ibu ion o his
s udy o he li e a u e and he a alanche o new indings as ela ed o he use o DLLP o
ea nings and capi al managemen by Nige ian DMBs du ing IFRS migh be cons ained by he
exclusion o IFRS 9 egime in he co e age bu mi iga ed by pa ial implemen a ion o IFRS 9 in
he coun y o he i s ou yea s, wi h e ec om 1 Janua y 2018. This is an indica ion ha
u u e Nige ian s udies s and he chance o p o iding addi ional e idence h ough a
compa ison o disc e iona y p o isioning beha iou o he wo egimes in loan loss epo ing.
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