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Income determination - Essay Example

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Greenawalt and Sinkey in their research tests the income-smoothing hypothesis among 106 large banks for a period of eight years (1976-1984).1 The study intends to find the effect of bank provision for loan losses as a fraction of company’s income. Moreover, the study also…
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Income determination

Download file to see previous pages... ucts.2 Though there has no other research on the study of income smoothening Greenawalt and Sinkey study has helped Bank Company to provide income smoothening to loans to avoid losses that result from loan defaulters and bad debt.3 Greenawalt and Sinkey wonder why managers would want to smooth accounting incomes using loan loss provisions.4 This makes sense as it enables businesses to balance out the income when there is a boom and for the time businesses experience burst or recession. The two author provide a regression analysis data that have an R2 value of more than 0.5%.5 Therefore, the authors provide evidence into 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.6 Busch and Kick find out that almost all bank that exercised risk adjustment returns on its loans had positive higher income activities.7 Moreover, their study contributes empirical evidence that bank that involved in fee generating activities do so with high risk. The authors postulate that only in risking in noninterest activities that commercial bank remain relevant in the market.8 Busch and Kick argue that the increased demand for noninterest goods and services prompt bank to abandon the traditional sources of income due to the advent of new technology in communication and other areas in the economy.9 Busch and Kick proved that the noninterest activities are generating more income for the bank more than the interest-based activities.10 For this reason, the authors are advocating commercial bank to 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 hypothesised that income is subject to fluctuation and is characterised by boom and busts.11 He questions the classical economist theories for failing to provide an ...Download file to see next pagesRead More
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