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Economic Consequences of Banks’ Use of their Discretion over the Accounting and Regulatory Treatment of Investment Securities

Author

Listed:
  • Marc Arnold

    (University of St. Gallen and Swiss Finance Institute)

  • Minyue Dong

    (University of Lausanne)

  • Romain Oberson

    (Université Laval)

Abstract

The current accounting and regulatory framework grants banks considerable discretion in the treatment of investment securities. We show that banks' use of this discretion increases the information asymmetry reflected in their equity prices. In addition, we find that this source of bank opacity contributes to individual bank risk and systemic risk in the financial sector. To address endogeneity concerns, we apply a two-stage instrumental variable approach, which confirms our conjecture. Our results highlight important unintended economic consequences of the current accounting and regulatory framework for investment securities.

Suggested Citation

  • Marc Arnold & Minyue Dong & Romain Oberson, 2023. "Economic Consequences of Banks’ Use of their Discretion over the Accounting and Regulatory Treatment of Investment Securities," Swiss Finance Institute Research Paper Series 23-36, Swiss Finance Institute, revised Jun 2023.
    • Handle: RePEc:chf:rpseri:rp2336
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    More about this item

    Keywords

    investment securities; accounting discretion; regulatory arbitrage; information asymmetry; banks;
    All these keywords.

    JEL classification:

    • 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
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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