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Bank valuation and accounting discretion during a financial crisis

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  • Huizinga, Harry
  • Laeven, Luc

Abstract

This paper shows that banks overstate the value of distressed assets and their regulatory capital during the US mortgage crisis. Real estate-related assets are overvalued in banks' balance sheets, especially those of bigger banks, compared to the market value of these assets. Banks with large exposure to mortgage-backed securities also provision less for bad loans. Furthermore, distressed banks use discretion over the classification of mortgage-backed securities to inflate their books. Our results indicate that banks' balance sheets offer a distorted view of the financial health of the banks and provide suggestive evidence of regulatory forbearance and noncompliance with accounting rules.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 106 (2012)
Issue (Month): 3 ()
Pages: 614-634

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Handle: RePEc:eee:jfinec:v:106:y:2012:i:3:p:614-634

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Managerial discretion; Regulatory forbearance; Accounting; Banking; Financial crisis;

References

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Citations

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Cited by:
  1. Natalya Martynova & Lev Ratnovski & Razvan Vlahu, 2014. "Franchise value and risk-taking in modern banks," DNB Working Papers 430, Netherlands Central Bank, Research Department.
  2. DellʼAriccia, Giovanni & Laeven, Luc & Marquez, Robert, 2014. "Real interest rates, leverage, and bank risk-taking," Journal of Economic Theory, Elsevier, vol. 149(C), pages 65-99.
  3. Ulf Mohrmann & Jan Riepe & Ulrike Stefani, 2013. "Are Extensive Audits 'Good News'? Market Perceptions of Abnormal Audit Fees and Fair Value Disclosures," Working Paper Series of the Department of Economics, University of Konstanz 2013-08, Department of Economics, University of Konstanz.
  4. Vollmer, Uwe & Wiese, Harald, 2013. "Minimum capital requirements, bank supervision and special resolution schemes. Consequences for bank risk-taking," Journal of Financial Stability, Elsevier, vol. 9(4), pages 487-497.

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