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Accounting Discretion of Banks During a Financial Crisis

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  • Luc Laeven
  • Harry Huizinga

Abstract

This paper shows that banks use accounting discretion to overstate the value of distressed assets. Banks'' balance sheets overvalue real estate-related assets compared to the market value of these assets, especially during the U.S. mortgage crisis. Share prices of banks with large exposure to mortgage-backed securities also react favorably to recent changes in accounting rules that relax fair-value accounting, and these banks provision less for bad loans. Furthermore, distressed banks use discretion in 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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/207.

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Length: 41
Date of creation: 01 Sep 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/207

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Keywords: Asset management; Bank accounting; Banks; Housing prices; Liquidity management; Real estate prices; real estate; real estate loans; tier 1 capital; bank assets; real estate loan; bank holding; bank holding companies; bank share; bank capital; banking; bank balance sheet; bank regulation; regulatory forbearance; bank loan; accounting standard; real estate assets; bank fragility; banks ? balance sheets; holding company; accounting treatment; asset classification; bank stocks; bank value; bank shares; real estate market; bank funding; banks ? asset; bank failures; deposit insurance; bank stock; bank size; bank equity; tier 2 capital; capital adequacy; bank holding company; bank valuation; accounting framework; real estate markets; accounting system; bank balance sheets; financial strength; impaired asset; banking sector; retained earnings; bank lending; bank discretion; bank performance; bank intervention; bank shareholders; income statement; bank finance; subordinated debt; banks ? assets; banking institutions; real estate asset; banks loan; bank stock prices; bank regulations; banking crisis; loan loss reserve; bank liabilities;

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References

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  1. Laux, Christian & Leuz, Christian, 2009. "The crisis of fair-value accounting: Making sense of the recent debate," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 826-834, August.
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Citations

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Cited by:
  1. Kollmann, Robert & Zeugner, Stefan, 2012. "Leverage as a predictor for real activity and volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1267-1283.
  2. Robert KOLLMANN, 2011. "Global Banking and International Business Cycles," 2011 Meeting Papers 20, Society for Economic Dynamics.
  3. Kollmann, Robert, 2012. "Global Banks, Financial Shocks and International Business Cycles: Evidence from an Estimated Model," CEPR Discussion Papers 8985, C.E.P.R. Discussion Papers.
  4. European Commission, 2010. "Tax Policy after the Crisis: Monitoring Tax Revenues and Tax Reforms in EU Member States 2010 Report," Taxation Papers 24, Directorate General Taxation and Customs Union, European Commission.
  5. Ceyla Pazarbasioglu & Luc Laeven & Oana M. Nedelescu & Stijn Claessens & Fabian Valencia & Marc Dobler & Katharine Seal, 2011. "Crisis Management and Resolution," IMF Staff Discussion Notes 11/05, International Monetary Fund.
  6. Matej Marinc & Razvan Vlahu, 2011. "The Economic Perspective of Bank Bankruptcy Law," DNB Working Papers 310, Netherlands Central Bank, Research Department.
  7. Nicolas Veron, 2011. "Keeping the Promise of Global Accounting Standards," Policy Briefs PB11-11, Peterson Institute for International Economics.
  8. Luc Laeven, 2011. "Banking Crises: A Review," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 17-40, December.
  9. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2012. "Nach dem EU-Gipfel: Zeit für langfristige Lösungen nutzen," Special Reports / Sondergutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, number 75379.

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