Bank Earnings Management and Income Smoothing using Commission and Fee Income : A European Context

We investigate whether European banks use commission and fee income to smooth reported earnings or to persistently increase reported earnings as an income-increasing earnings management strategy. We find that European banks use commission and fee income to smooth reported earnings and this behaviour is pronounced among non-too-big-to-fail European banks compared to too-big-to-fail European banks. We also find a positive and significant correlation between interest income and noninterest income (commission and fee income) indicating increased systematic risk due to reduced diversification benefits. We also find that the commission and fee income of non-too-big-to-fail banks is procyclical with fluctuating economic conditions but not for too-big-to-fail banks. Also, we find evidence for income-increasing earnings management (i) in the post-crisis period, (ii) for larger European banks (iii) and when banks have higher ex-post interest income, implying that the propensity to engage in income-increasing earnings management significantly depend on bank size and ex-post interest margin considerations. The findings have policy implications