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The IFRS option to reclassify financial assets out of fair value in 2008: the roles played by regulatory capital and too-important-to-fail status

Author

Listed:
  • Peter Fiechter

    (University of Neuchatel)

  • Wayne R. Landsman

    (University of North Carolina at Chapel Hill)

  • Kenneth Peasnell

    (Lancaster University)

  • Annelies Renders

    (Maastricht University School of Business and Economics)

Abstract

Amendment of IAS 39 by the IASB in 2008 provided an option to reclassify investments from fair value to historical cost. We predict that too-important-to-fail (TITF) banks took less advantage of this option because the political protection they enjoyed insulated them from regulatory pressure. Banks that did not enjoy this protection had greater reason to make use of this option since doing so would protect their Tier 1 capital. As predicted, findings reveal that TITF banks made less use of the reclassification option to protect their Tier 1 capital and there is a significant moderating influence of TITF status on the incentive to reclassify investments for banks with lower regulatory capital. This finding is consistent with TITF banks placing less weight on protecting regulatory capital and thereby retaining flexibility to sell assets. Our findings provide evidence that accounting choices are affected by the importance of banks to their economies.

Suggested Citation

  • Peter Fiechter & Wayne R. Landsman & Kenneth Peasnell & Annelies Renders, 2017. "The IFRS option to reclassify financial assets out of fair value in 2008: the roles played by regulatory capital and too-important-to-fail status," Review of Accounting Studies, Springer, vol. 22(4), pages 1698-1731, December.
    • Handle: RePEc:spr:reaccs:v:22:y:2017:i:4:d:10.1007_s11142-017-9419-x
    DOI: 10.1007/s11142-017-9419-x
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    Cited by:

    1. Lee, Eugenia Y. & Kim, Young Jun & Lee, Sangyoon, 2023. "Fair value information and regulatory capital management using financial asset reclassification by Korean insurers," Finance Research Letters, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    Too important to fail; Fair value accounting; Bank regulation; Financial crisis;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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