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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.

Suggested Citation

  • Huizinga, Harry & Laeven, Luc, 2012. "Bank valuation and accounting discretion during a financial crisis," Journal of Financial Economics, Elsevier, vol. 106(3), pages 614-634.
  • Handle: RePEc:eee:jfinec:v:106:y:2012:i:3:p:614-634
    DOI: 10.1016/j.jfineco.2012.06.008
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