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

Marc Arnold, Minyue Dong and Romain Oberson
Additional contact information
Marc Arnold: University of St. Gallen and Swiss Finance Institute
Minyue Dong: University of Lausanne
Romain Oberson: Université Laval

No 23-36, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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.

Keywords: investment securities; accounting discretion; regulatory arbitrage; information asymmetry; banks (search for similar items in EconPapers)
JEL-codes: G21 G28 K22 M41 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2023-06, Revised 2023-06
New Economics Papers: this item is included in nep-ban
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4291026 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2336

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().