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Accounting Discretion of Banks During a Financial Crisis

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  • Huizinga, H.P.

    (Tilburg University, Center For Economic Research)

  • Laeven, L.

    (Tilburg University, Center For Economic Research)

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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Suggested Citation

  • Huizinga, H.P. & Laeven, L., 2009. "Accounting Discretion of Banks During a Financial Crisis," Discussion Paper 2009-58, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:09764c84-fa16-45e7-942d-b93d7f2443ab
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    More about this item

    Keywords

    bank regulation; accounting standards; fair value accounting; real estate loans; mortgage-backed securities; 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

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