15th Annual Meeting of the German Finance Association (DGF)


Abstract

To Use or Not To Use - An Empirical Study of Visible Reserves in Bank Accounting in the Light of Regulatory Requirements and Informational Asymmetries

Bornemann, Sven; Homölle, Susanne; Hubensack, Carsten; Pfingsten, Andreas

The German Commercial Code (’HGB’) allows banks to build visible reserves for general banking risks according to para. 340g HGB. Setting aside these ’GBR-reserves’, in addition to their risk provisioning function, may also be used for enhancing capital endowment, internal financing or earnings management purposes. We analyze German banks’ financial statements for the period from 1993 through 2005 to reveal bank type specific patterns in using GBR-reserves. Our empirical investigation is based on a large, unbalanced panel of German banks including 22,080 observations. We explain our findings by regulatory rea- sons and existing information asymmetries as well as by the legal status and the ownership structure of the banks. We see (1) the use of GBR-reserves increasing over time. Furthermore, we can say that GBR-reserves are primarily used by (2) large banks, (3) public banks, (4) banks reporting according to IAS/IFRS, and (5) banks with comparatively low regulatory capital endowment. Moreover, our results show that (6) predominantly banks which are not thrifts and cooperatives are making use of GBR-reserves, and (7) that GBR-reserves are used for earnings management purposes.
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