Accounting for financial stability: Bank disclosure and loss recognition in the financial crisis

Jannis Bischof, Christian Laux and Christian Leuz

Journal of Financial Economics, 2021, vol. 141, issue 3, 1188-1217

Abstract: This paper examines banks’ disclosures and loss recognition in the 2007–2009 financial crisis and identifies several core issues for the link between accounting and financial stability. We show that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. The recognition of loan losses also was slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis indicates that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several significant challenges if accounting and financial reporting are to contribute to financial stability.

Keywords: Banks; Financial crisis; Financial stability; Disclosure; Loan loss accounting; Expected credit losses; Incurred loss model; Prudential filter; Fair value accounting (search for similar items in EconPapers)
JEL-codes: G21 G22 G28 G32 G38 K22 M41 M42 M48 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X21001987
Full text for ScienceDirect subscribers only

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:eee:jfinec:v:141:y:2021:i:3:p:1188-1217

DOI: 10.1016/j.jfineco.2021.05.016

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().