Bank valuation and accounting discretion during a financial crisis |
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Authors: | Harry Huizinga Luc Laeven |
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Institution: | 1. Tilburg University, Netherlands;2. CEPR, United Kingdom;3. International Monetary Fund, United States |
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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. |
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Keywords: | Managerial discretion Regulatory forbearance Accounting Banking Financial crisis |
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