Bank Income Smoothing during the COVID-19 Pandemic : Evidence from UK Banks

This paper investigates the relationship between loan loss provisions and pre-provisions earnings during the first-wave COVID-19 pandemic. A positive co-movement between the two variables indicates income smoothing. The pandemic period was compared with the pre-pandemic period using quarterly data of four systemic banks in the UK from Q1 2019 to Q4 2020. The findings show that loan loss provisions have 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 Q2 2020 and declined in the subsequent quarters. The regression results show a positive relationship between loan loss provisions and pre-provisions earnings both in the pre-pandemic and pandemic quarters. The relationship is stronger in the pandemic period than in the pre-pandemic period which indicates greater income smoothing in the pandemic period. The correlation results also show a strong positive correlation between loan loss provisions and pre-provisions earnings in the pandemic period. In the individual bank analysis, three of the four systemic banks exhibit greater income smoothing in the pandemic period than in the pre-pandemic period