The brazilian financial institutions use the loan loss provisions for capital management

Abstract

This study aimed to verify if the Brazilian financial institutions use the discretionary loan loss provision as a capital management tool, caractherized by the adoption of mechanisms to control the level of the regulatory capital ratio. For this purpose, quarterly data were analyzed from 2000 to 2015 of the 50 largest conglomerates and financial institutions operating in the Brazilian Financial System. In carrying out empirical tests were estimated models using panel data with sectional fixed effects, and considered two variables representing the level of capital: the BIS ratio, a measure of regulatory capital requirements; and a proxy-based financial information. The discretion in recognition of the loan loss provision, in turn, was defined as the amount of provision for losses above the minimum set forth in CMN Resolution 2682 (1999). The test results revealed that there is no evidence that Brazilian banks use discretion in setting up the loan loss provision for capital management purposes. On the other hand, it strengthened the evidence from previous studies, national and international, on the subject, in the sense that institutions use this discretion in the loan loss provision for the purpose of earnings management. Even when applied to financial institutions considered "less" capitalized, the tests did not confirm the hypothesis of capital management. The study contributes to the ongoing discussions in the context of financial regulators and banking on the current model of provision for credit losses.The V