Bank income smoothing during the COVID-19 pandemic: Evidence from UK Banks

This paper examines the association between bank loan loss provisions and the pre-provisions earnings of UK banks during the first-wave of the COVID-19 pandemic. A positive co-movement between the two variables indicates evidence of income smoothing. The findings show that loan loss provision has an inverted V-shaped property during the first-wave COVID-19 pandemic. Loan loss provisions reached its highest level at the peak of the pandemic in the second quarter of 2020 and declined in the subsequent quarters. The regression results show a positive relationship between loan loss provisions and pre-provisions earnings during the pandemic quarters and in the pre-pandemic quarters. The positive relationship is stronger in the pandemic quarters and indicates evidence of higher income smoothing in the pandemic quarters. The correlation results also show a strong positive correlation between bank provisions and pre-provisions earnings in the pandemic period. In the individual bank analysis, three of the four systemic banks exhibit higher income smoothing during the pandemic quarters. The implication of the findings is that UK systemic banks engaged in earnings management as a coping mechanism to mitigate the effect of the pandemic on their profits.