The effect of decreasing interest rates on European banks’ earnings quality
-
DOIhttp://dx.doi.org/10.21511/bbs.14(2).2019.15
-
Article InfoVolume 14 2019, Issue #2, pp. 174-180
- Cited by
- 870 Views
-
190 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Earnings quality (EQ) is an indicator generally defined as a mix of many components like persistence, predictability, volatility and smoothing of earnings. This study is based on the hypothesis that in the banking sector, any changes in interest rates make a remarkable effect on these characteristics of earnings, and thus may influence EQ. Between 2007 and 2015, there has been a general decreasing trend in interest rates across Europe, with varying slopes in different countries. Using data of 128 European banks from 27 countries, it is examined how the extent of interest rate decrease influenced the EQ of banks. It was found that the extent of interest decrease negatively affects earnings quality, meaning that the EQ of banks located in countries with less drastic relative interest cuts between 2007 and 2015 (typically less developed Central and Eastern European countries) is higher than the EQ of banks from developed countries with significant relative interest cuts in the same period.
- Keywords
-
JEL Classification (Paper profile tab)E43, G21, M41
-
References20
-
Tables5
-
Figures2
-
- Figure 1. Average interest rate (%) of 27 European countries between 2007 and 2015
- Figure 2. Average interest rates (%) in the three clusters between 2007 and 2015
-
- Table 1. Components of earnings quality (EQ)
- Table 2. Definition and content of the three examined clusters
- Table 3. Average EQ in the three clusters
- Table 4. Descriptive statistics for the variables
- Table 5. Testing results for the regression model
-
- Albetrazzi, U., & Gambacorta, L. (2009). Bank Profitability and the Business Cycle. Journal of Financial Stability, 5(4), 393-409.
- Alessandri, P., & Nelson, B. (2015). Simple Banking: Profitability and the Yield Curve. Journal of Money Credit and Banking, 47(1), 143-175.
- An, Y. (2017). Measuring Earnings Quality Over Time. International Journal of Economics and Financial Issues, 7(3), 82-87.
- Arpa, M., Giulini, I., Ittner, A., & Pauer, F. (2001). The Influence of Macroeconomic Developments on Austrian Banks: Implications for Banking Supervision (Bank of International Settlements Papers No. 1). Basel: BIS.
- Beckmann, R. (2007). Profitability of Western European Banking Systems: Panel Evidence on Structural and Cyclical Determinants (Deutsche Bundesbank Discussion Paper, Series 2: Banking and Financial Studies No. 17/2007). Frankfurt: Deutsche Bundesbank.
- Busch, R., & Memmel, C. (2015). Banks’ Net Interest Margin and the Level of Interest Rates (Deutsche Bundesbank Discussion Paper No. 16/2015), Frankfurt: Deutsche Bundesbank.
- Cohen, D. A. (2003). Quality of Financial Reporting Choice: Determinants and Economic Consequences (Working Paper). Northwestern University.
- Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2-3), 344-401.
- Dechow, P., & Schrand, C. (2004). Earnings Quality (160 p.). The Research Foundation of CFA Institute.
- Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2004). Costs of Equity and Earnings Attributes. The Accounting Review, 79(4), 967-1010.
- Gaio, C. (2010). The relative importance of firm and country characteristics for earnings quality around the world. European Accounting Review, 19(4), 693-738.
- Genay, H., & Podjasek, R. (2014). What Is the Impact of a Low Interest Rate Environment on Bank Profitability? (Chicago Fed Letter No 324). Federal Reserve Bank of Chicago.
- Gros, D., Blot, C., Hubert, P., Demertzis, M., & Wolff, G. B. (2016). How do low and negative interest rates affect banks’ activity and profitability in the euro area? (Monetary Dialogue). European Parliament.
- Hodge, F. (2003). Investors’ Perceptions of Earnings Quality, Auditor Independence, and the Usefulness of Audited Financial Information. Accounting Horizons, 17, 37-48.
- Kirschenheiter, M., & Melumad, N. (2004). Earnings’ quality and smoothing (Working Paper). Columbia Business School.
- Mikhail, M., Walther, B., & Willis, R. (2003). Reactions to Dividend Changes Conditional on Earnings Quality. Journal of Accounting, Auditing and Finance, 18(1), 121-151.
- Paoloni, M., Paolucci, D., & Menicucci, E. (2017). Fair value accounting and earnings quality (EQ) in banking sector: Evidence from Europe. African Journal of Business Management, 11(20), 597-607.
- Penman, S. (2003). The quality of financial statements: Perspectives from the recent stock market bubble. Accounting Horizons, 17, 77-96.
- Schipper, K., & Vincent, L. (2003). Earnings Quality. Accounting Horizons, 17, 97-111.
- Takacs, A., & Szucs, T. (2017). How Fair Value Regained Its Importance after the Crisis: Empirical Evidence from the European Banking Sector. International Research Journal of Finance and Economics, 163, 7-16.