Re-examination of the banking window dressing theory. New methodological approaches and empirical evidence from the Greek case
| Date | 13 July 2015 |
| DOI | https://doi.org/10.1108/JFRC-06-2014-0027 |
| Published date | 13 July 2015 |
| Pages | 252-270 |
| Author | Evangelos Vasileiou |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Re-examination of the banking
window dressing theory
New methodological approaches and
empirical evidence from the Greek case
Evangelos Vasileiou
Department of Business Administration, University of the Aegean, Chios, Greece
Abstract
Purpose – The purpose of this paper is to re-examine in detail the banking window dressing (WD)
theory. Using data from the Greek banking industry during the euro period (2001-2013), the results
suggest that there are signs of upward assets and deposits WD. Moreover, it tries to explain, using
new-alternative approaches, the incentives for the WD and how the deposits WD occur.
Design/methodology/approach – To examine why bank managers upwardly WD the deposits and
which strategy increases the regular payments cost, the author uses a Granger causality procedure and
conrms the theory that the aim of increased assets report causes the deposits WD. Moreover, using a
GARCH(1,1) and a methodological approach that is usually used in calendar anomalies, but is more
exible than the one usually applied, enables us not only to conrm that there is a WD but also under
which mechanisms it occurs.
Findings – Bank managers prefer to pay increased regular payments due to the upward deposits WD
to upwardly WD the bank assets, for the following reasons: they receive compensation depending on the
assets’ volume, they gain prestige and most managers try to present increased bank assets and deposits
to include them in the “too big to fail ” (TBTF) regime. The author also nds that managers increase the
new offered bank premiums in the quarters’ end to attract more deposits, and in this way, the deposits
WD occurs.
Research limitations/implications – The ndings of this study are limited to the Greek case, but
the methodological approach may be applied to other cases to examine the WD theory and it could
present a new-exible way for WD research.
Practical implications – Examining the institutional framework, the theoretical background and
the results, the author may suggest that reforms, at least in the way that the regular payment to the
Greek deposits insurer are paid, should be applied. In Greece, 80 per cent of the regular DIS payments
are deposited in the same nancial institution. This reduction of the ratio signicantly increase the
deposits WD cost.
Originality/value – The contribution of this paper is to re-examine the WD theory and to suggest new
and more exible methodological approaches. Moreover, this is the rst study that examines the WD for
the Greek case.
Keywords Greece, Bank opacity, Banking crisis, Window dressing
Paper type Research paper
1. Introduction
The recent nancial crisis has revealed several pathogens of the contemporary global
economic environment. Many scholars suggest that the increased bank opacity and the
lack of trust, after the crisis started, are some of the major reasons of the nancial crisis
(Gorton, 2009;Flannery et al., 2013). However, examining the bank opacity literature, the
The current issue and full text archive of this journal is available on Emerald Insight at:
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JFRC
23,3
252
Journalof Financial Regulation
andCompliance
Vol.23 No. 3, 2015
pp.252-270
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-06-2014-0027
bank window dressing (WD) theory, and especially the Allen and Saunders (1992)
seminal paper, stimulated our interest. It is notable that even if the WD theory may be
linked to the recent crisis, there are no recent similar studies (to the best of our
knowledge).
To examine the specic issue, I have applied the Allen and Saunders (1992)
methodology and some new-alternative methodological approaches to (re)examine the
WD theory using data from the Greek banking industry. The author examines the Greek
case considering that the Greek issue has been worrying the European Monetary Union
(EMU) during the past years (Vasileiou, 2013), while there are recent empirical studies
for supercial market discipline (MD) caused by deciencies in the Greek institutional
framework (Vasileiou, 2014a).
The empirical application of the specic issue is linked to the bank opacity because as
Allen and Saunders (1992) suggest, the WD is a temporary deviation of a bank’s end of
accounting period accounts from the permanent level. Therefore, if there is a WD,
depositors which are mainly informed by the quarters’ end nancial statements are
subject to bank opacity. In their paper, they explain several ways of WD techniques, the
managers, stockholders and regulators incentives which are related to the WD, and
empirically provide evidence for the assets and the deposits window dressing (DWD).
However, they do not show how the WD occurs.
This study’s main objective is not only to provide empirical evidence for WD
existence but also to show:
• if there is a specic WD causality between the assets and deposits WD;
• if there is a specic managerial behaviour that could inuence the deposits
WD; and
• the depositors’ role in this.
To examine in detail the DWD issue, the author applies a GARCH model and an
alternative approach that is mainly used in month effect studies.
The sample of the study covers data from the Greek banking industry for the period
2001-2013, and the empirical ndings suggest that there is evidence for an upward WD.
The managers’ need to present increased bank assets causes the deposits WD.
Furthermore, regarding the deposits WD, the author provides empirical evidence that
bank managers increase the offered bank premiums in each quarter’s end to attract more
deposits and the depositors respond to their call.
This study contributes to the literature by:
• adding empirical research to the international literature, while it is the rst
concerning the Greek case, providing empirical evidence for an upward WD in
Greek banking market;
• presenting how the bankers inuence the DWD;
• presenting an alternative and more exible methodological approach in the WD
study; and
• highlighting institutional deciencies and suggesting possible measures that
could reduce the DWD.
The specic approach enables scholars to examine the DWD in other countries and to
reach useful conclusions for the way DWD occurs to reduce it.
253
The banking
window
dressing
theory
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