Asian Banking Implications from Crisis: Malaysian Commercial Banks’ Income Smoothing Behaviour through Loan Loss Provisions

Mohd Yaziz Mohd Isa¹, Yap Voon Choong², David Yong Gun Fie³, Zulkifflee Mohamed⁴, Syed Omar Syed Agil⁵ 
(1. 4. 5. Universiti Tun Abdul Razak, Malaysia; 2. 3. Multimedia University, Malaysia)

Abstract: This paper used results of panel least squares regression model to study on income smoothing behaviour through loan loss provisions of commercial banks in Malaysia during the Asian finance and banking crisis covering from the Asian currency crisis 1997, the United States sub-prime crisis 2009, and the current Euro debt crisis. Income smoothing behaviour is defined as behaviour that earnings do not dip or rise according to actual performance, and thus shows little fluctuations. The findings showed the banks in Malaysia did not smooth their income through loan loss provisions. Some possible explanations were good governance with stringent conditions imposed by regulators instead of market discipline.

Key words: non-performing loans; income smoothing; loan loss provisioning practices

JEL code: G21