The purpose of this study is to analyze the effect of banks loss recognition on pro-cyclicality and earnings management. Banks’ loss recognition is defined in Basel II and IFRS9. Expected losses of Basel II were implemented to mitigate the pro-cyclicality of reducing lending during the recession periods through an early loss recognition. Therefore, this study examines whether banks’ early loss recognition mitigates pro-cyclicality and analyzes banks earnings management by an early loss recognition. As a result of the analysis, pro-cyclicality in the recession period also appeared in Korea. However, in the case of banks that recognize early losses, the decline in lending during the recession periods has not eased. This implies that an early recognition of loss does not mitigate the pro-cyclicality. On the other hand, banks early loss recognition mitigated income smoothing by LLP. Banks have a tendency to smoothing their income by raising their LLP when earnings increase. However, an early loss recognition reduced this income smoothing. As a result, the bank is making preemptive earnings management with an early loss recognition reflecting current and future conditions. As a result of Basel II implementation, banks’ discretion has increased and earnings management has been further strengthened. In a further analysis, an early loss recognition did not mitigate the decline in lending even when lending was curtailed. Even if the economic downturn is defined in various ways, an early loss recognition is not expected to mitigate pro-cyclicality. An early loss recognition did not mitigate pro-cyclicality before and after IAS 39 as well as Basel II. In addition, income smoothing by LLP was strengthened after Basel II, which is considered to be due to the increased discretion of banks. In fact, discretionary LLP increased significantly after the implementation of Basel II. This study showed that the purpose of Basel II implementation was not realized. On the other hand, it reveals that earnings management due to the increase of discretion of banks is strengthened, suggesting the direction of future improvement of supervision system.