The Effect of Bank Provision for Loan Losses - Essay Example

The author report that there is evidence of an income smoothening effect over the study period. Greenawalt and Sinkey's efforts add important knowledge to the operation of banking services on noninterest products. Though there has been no other research on the study of income smoothening Greenawalt and Sinkey's study has helped Bank Company to provide income smoothening to loans to avoid losses that result from loan defaulters and bad debt. Greenawalt and Sinkey wonder why managers would want to smooth accounting incomes using loan loss provisions. This makes sense as it enables businesses to balance out the income when there is a boom and for the time businesses experience bursts or recession. The two authors provide regression analysis data that have an R2 value of more than 0.5%. Therefore, the authors provide evidence of the use and success of income smoothening among large banks.
Busch and Kick examine the determinant of noninterest earnings and their effect on financial risk and performance in Germany. Busch and Kick find out that almost all banks that exercised risk adjustment returns on their loans had positive higher-income activities. Moreover, their study contributes empirical evidence that banks that are involved in fee-generating activities do so with high risk. The authors postulate that only in risking in noninterest activities that commercial banks remain relevant in the market. Busch and Kick argue that the increased demand for noninterest goods and services prompts banks to abandon traditional sources of income due to the advent of new technology in communication and other areas of the economy. Busch and Kick proved that noninterest activities are generating more income for the bank than interest-based activities. For this reason, the authors are advocating commercial banks embrace the noninterest generating activities fully because they bring more income and also because they have a high demand in the market.
Keynes in his analysis of income determination of a country hypothesized that income is subject to fluctuation and is characterized by booms and busts.

He proposes that a country can come out of recession by application of fiscal policies that endeared to increase people's consumption and thus increase production. He frames his analysis for income determination in his famous Keynesian theory of income determination. Keynes found that income is generated as a result of increased consumption, saving, and investment in a closed economy. Keynes assumes that if government expenditures increase economic production would increase, and the country would fight out of a recession. Read More