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Bank valuation and accounting discretion during a financial crisis

Harry Huizinga and Luc Laeven ()

Journal of Financial Economics, 2012, vol. 106, issue 3, 614-634

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.

Keywords: Managerial discretion; Regulatory forbearance; Accounting; Banking; Financial crisis (search for similar items in EconPapers)
Date: 2012
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