Central bank digital currency and bank earnings management using loan loss provisions
| DOI | https://doi.org/10.1108/DPRG-11-2022-0139 |
| Published date | 02 February 2023 |
| Date | 02 February 2023 |
| Pages | 206-220 |
| Subject Matter | Information & knowledge management,Information management & governance,Information policy |
| Author | Peterson K. Ozili |
Central bank digital currency and bank
earnings management using
loan loss provisions
Peterson K. Ozili
Abstract
Purpose –This paper aims to analysethe role of central bank digital currency (CBDC) in bank earnings
management and focus on how CBDC activity might influence banks to engage in accrual earnings
managementusing loan loss provisions (LLPs) and the implicationsfor earnings quality.
Design/methodology/approach –The paper used conceptual discourse analysisto explain the role of
CBDC in bank earningsmanagement.
Findings –Banks will use accruals, such as LLPs, to manage earnings when CBDC-induced bank
disintermediationleads to a reduction in bank deposits,a reduction in bank lending anda likely reduction
in reported earnings. Bank managers will mitigate the reduction in reported earnings by lowering
discretionaryLLPs to increase reportedearnings.
Originality/value –The recent emergenceof CBDC in the digital currency universe has led to increased
research intereston the role of CBDC in corporations and society. This study contributes to the literature
by focusingon banks, and examining the effect of CBDC on bankearnings management.
Keywords Banks, Earnings management, Central bank digital currency, Loan loss provisions,
Disintermediation, Accruals, Income smoothing, Migration,Earnings quality, Income smoothing
Paper type Conceptual paper
1. Introduction
This purpose of this study is to examine the role of central bank digital currency (CBDC) in
bank earnings management.The study focusses on how CBDC activity can influence banks
to engage in accrual earning management.
CBDC is money or legal tender in digital form and is a liability of the issuing central bank
(Bindseil, 2019). Most CBDCs are designed to permit the transfer of CBDC deposits into a
bank account as “bank deposits” (Sanchez-Roger and Puyol-Ant
on, 2021). CBDCs are also
designed to permit the transfer of bank depositsinto a CBDC account as “CBDC deposits”.
The process of moving deposits from a bank account to CBDC account is commonly
referred to as bank disintermediation because the migrated bank deposits are no longer
available to banks for the purposeof financial intermediation (Bindseil, 2019), while the two-
way movement of deposits from banks to the central bank and from the central bank to
banks is generally known as deposit substitution (Bacchetta and Perazzi, 2021). A CBDC is
a recent digital innovation, and is considered to be an external factor which banks must
take into account in their banking business due to the potential effect of CBDC on bank
deposits and the ripple effect on other areas of banking(Ozili, 2022b).
Previous studies have examined the external factors that encourage bank earnings
management such as changes in prudential regulation (Lim and Yong, 2017), changes in
accounting rules (Kilic, et al., 2013), crisis resolution policies (Fan et al., 2020) and Fintech
Peterson K. Ozili is based
at the Governors
Department, Central Bank
of Nigeria, Abuja, Nigeria.
Received 25 November 2022
Revised 18 December 2022
Accepted 9 January 2023
PAGE 206 jDIGITAL POLICY, REGULATION AND GOVERNANCE jVOL. 25 NO. 3 2023, pp. 206-220, ©Emerald Publishing Limited, ISSN 2398-5038 DOI 10.1108/DPRG-11-2022-0139
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