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Regulatory Forbearance and the Role of Financial Reporting Transparency during a Bank Crisis

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Author Info

  • Olaf Clemens

    ()
    (Goethe University Frankfurt, Department of Finance, Grüneburgplatz 1, 60323 Frankfurt am Main)

  • Ulrich Schüwer

    ()
    (Goethe University Frankfurt, Department of Finance, Grüneburgplatz 1, 60323 Frankfurt am Main)

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    Abstract

    Regulatory forbearance is a controversial strategy for dealing with weak banks. We analyze forbearance regarding the disclosure of a bank’s financial difficulties, using a case study of the financial crisis of the mortgage bank AHBR during the years 2001 to 2005. AHBR was one of the largest German mortgage banks at that time and considered as highly systemically relevant. Our case study evidence shows that regulatory forbearance can be a successful short-term strategy for a single bank crisis. However, it also weakens the trust of investors in public information and the financial system. Our analysis suggests that the potential existence of zombie banks creates an adverse selection problem, which implies higher risk premiums in the interbank market and finally increases the risks of a liquidity crunch.

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    Bibliographic Info

    Article provided by Credit and Capital Markets in its journal Credit and Capital Markets.

    Volume (Year): 47 (2014)
    Issue (Month): 1 ()
    Pages: 49–77

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    Handle: RePEc:kuk:journl:v:47:y:2014:i:1:p:49-77

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    Web page: http://www.credit-and-capital-markets.de/

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    Keywords: regulatory forbearance; financial reporting transparency; trust of investors;

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