Opaque bank assets and optimal equity capital

Min Dai, Shan Huang and Jussi Keppo

Journal of Economic Dynamics and Control, 2019, vol. 100, issue C, 369-394

Abstract: Banks’ assets are opaque, and therefore, we model their true accounting asset values as partially observed variables. We derive a stochastic control model to optimize banks’ dividend and recapitalization policies in this situation, and calibrate that to a sample of U.S. banks. By the calibrated model, the noise in reported accounting asset values hides about one-third of the true asset return volatility and raises the banks’ market equity value by 7.8%. Particularly, those banks with a high level of loan loss provisions, nonperforming assets, and real estate loans, and with a low volatility of reported total assets have noisy accounting asset values. Because of the substantial shock on the true asset values, the banks’ assets were more opaque during the recent financial crisis.

Keywords: Bank capital; Dividends; Investment; Earnings smoothing; Banking regulation (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G35 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:100:y:2019:i:c:p:369-394

DOI: 10.1016/j.jedc.2019.01.005

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