Research Insights: How deposit insurance affects bank accounting discretion

Rong Yang, professor of accounting, and Ashok Robin, professor of finance, seek to answer that question in a co-authored article, “Deposit insurance and accounting discretion in loan loss provisions,” published in the Journal of Corporate Finance (June 2025).

The Emergency Economic Stabilization Act (EESA) of 2008 increased the DI ceiling from $100,000 to $250,000 per account. This sharp, unanticipated shock provides an ideal setting to study the relationship between DI and accounting policy. Therefore, the authors gathered data from banks affected and unaffected by EESA, from twelve quarters before EESA and twelve after, that is, 4Q2005 to 4Q2011. The final sample included 7,738 observations on 314 affected banks and 1,830 observations on 74 control banks. Specifically, the authors studied the impact of EESA on a key accounting policy: discretion in banks’ loan loss provision (LLP).

The researchers found strong, consistent evidence that affected banks post higher discretionary LLP than unaffected banks. This result suggests a capital-reducing or conservative bent. Moreover, it implies that U.S. regulators provide the proper oversight and monitoring to limit opportunistic reporting.

View the paper published by the Journal of Corporate Finance in June 2025, “Deposit insurance and accounting discretion in loan loss provisions.”