BANK HOLDING COMPANIES’ EARNINGS MANAGEMENT LEADING UP TO REGULATORY CHANGES AFTER THE 2007–2009 GLOBAL FINANCIAL CRISIS

The 2007–2009 global financial crisis prompted significant regulatory reforms in the U.S. banking sector. Among these, advanced approaches bank holding companies (AABHCs) were required to gradually incorporate unrealized losses on available-for-sale (AFS) securities into regulatory capital between 2014 and 2018. This study examines how banks adjusted their earnings management strategies in response to this change, focusing on two key tools: discretionary loan loss provisions (LLPs) and AFS security sales. Using panel data, we find that AABHCs reduced their discretionary use of LLPs during the phase-in period, while comparable non-AABHCs with stronger capital positions increased such use, though the magnitude of this effect is limited. We find no consistent evidence of strategic AFS sales for earnings management by either group. Overall, the results suggest that the regulatory change did not generate significant unintended consequences for earnings management. However, regulators may need to more closely monitor LLP reporting quality, particularly among non-AABHCs with ample regulatory capital.