Thesis (MSC) - Cyprus International University. Institute of Graduate Studies and Research Department of Accounting and Finance

Includes bibliography (sheet 74)

ABSTRACT Deciding which amount is adequate as Allowances for loan losses (ALL) in a bank has been and still remains a conflicting issue between the Securities and Exchange Commission and the Regulatory authorities; putting the banker in a dilemma. While the Security and Exchange Commission advocates for bank transparency and pinpoints on a lesser amount to be kept as ALL, the regulatory authorities advocate for bank safety and insist on banks to constantly keep a higher amount as ALL. The research work objectively stands out to assess the relative amount a bank should be able to keep as allowances for loan losses at each point in time; while pinpointing the impact of this amount on the bank's ability to create credit. Notably, credit creation in a bank is a prime function and a primary source of income for the bank. The study draws its data from both primary and secondary sources; and uses linear regression and one sample T test to analyze the impact of the amount set as allowances for loan losses on credit creation in banks; from 2004 to 2019, cutting across the 2007/2008 financial crises; and uses seven United States banks for study. The study found out that there is generally a significant relationship between the amount individual banks set as allowances for loan losses and the credit they create at the end; while discovering the fact that income smoothing and large bank size tend to make credit creation less sensitive to the amount set as allowances for loan losses in banks. The findings amongst others buttoned up to the fact that the banks need to keep a higher amount for allowances for credit losses at each point in time, to guard against unexpected risk like the 2007/2008 financial crisis which was blamed on inadequate allowances for loan losses in banks.