Review of Quantitative Finance and Accounting

, Volume 52, Issue 4, pp 1011–1041 | Cite as

Did the regulatory changes of 1999 and 2001 affect income smoothing behavior of US banks?

  • Abdullah Mamun
  • Md Didarul Alam
  • George TannousEmail author
Original Research


This study examines the impact of the regulatory changes introduced by the Federal Financial Institutions Examination Council (FFIEC) in 1999 and by the Securities and Exchange Commission and FFIEC in 2001 on the income smoothing approaches and mechanisms employed by the United States (US) banking industry. We find that the relationship between previous quarter charge-offs and current quarter recoveries that was prevalent in the 1990’s to be insignificant for homogeneous loans but for heterogeneous loans the relationship became significant in the years following the regulatory changes. Recoveries are positively and significantly associated with the surprise net interest margin or return on assets which implies recoveries are primarily determined by the economic realities of the charged-off loans. The regulatory changes have strengthened the relationship between current quarter recoveries from heterogeneous loans and current quarter charge-offs but for homogeneous loans this relationship weakened insignificantly. The new regulations reduced the surprise gross loan charge-offs suggesting that the enforcement improved the accuracy of the provision as a predictor of next quarter’s gross loan charge-offs.


Bank income smoothing Regulatory changes Charge-off Recovery 

JEL Classification




The authors thank two anonymous referees, the editor, Professor Cheng-Few Lee, Sadok El Ghoul, University of Alberta, and colleagues at the Edwards School of Business, University of Saskatchewan for valuable comments and suggestions.


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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  • Abdullah Mamun
    • 1
  • Md Didarul Alam
    • 2
  • George Tannous
    • 1
    Email author
  1. 1.Edwards School of BusinessUniversity of SaskatchewanSaskatoonCanada
  2. 2.Ingram & Yeadon AccountantsMelfortCanada

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