Accounting standards and banking regulation: Some effects of divergence

Jeff Downing

Research in International Business and Finance, 2019, vol. 47, issue C, 386-397

Abstract: This paper examines the impact of divergence between accounting standards and banking regulation – for example, when banks’ assets are marked-to-market for regulatory purposes but not for accounting purposes. I build a model that examines divergence in connection with risk-management by banks. The model shows that divergence results in a risk-management trade-off – using derivatives to hedge has regulatory benefits but accounting costs, or vice versa. Banks thus hedge to a lesser extent. Hence, a negative shock is more likely to make banks insolvent. More generally, the model identifies a mechanism by which divergence can have undesirable “real effects.”

Keywords: Banks; Banking regulation; Accounting standards; Risk-management; Derivatives (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:47:y:2019:i:c:p:386-397

DOI: 10.1016/j.ribaf.2018.08.011

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